Development Dilemmas in Post Apartheid South Africa

Development Dilemmas in
Post-Apartheid South Africa
i
ii
Map of post-apartheid South Africa.
Development Dilemmas in
Post-Apartheid South Africa
Edited by Bill Freund and Harald Witt
iii
Published in 2010 by University of KwaZulu-Natal Press
Private Bag X01
Scottsville 3209
South Africa
E-mail: books@ukzn.ac.za
Website: www.ukznpress.co.za
© 2010 University of KwaZulu-Natal
All rights reserved. No part of this publication may be reproduced or transmitted in

any form or by any means, electronic or mechanical, including photocopying,
recording, or any information storage and retrieval system, without prior permission
in writing from the publishers.
ISBN: 978-1-86914-189-9
Managing editor: Sally Hines

Editor: Alison Lockhart
Typesetter: Patricia Comrie
Proofreader: Lisa Compton
Cover designer: luckyfish
Cover photographs: Armand Hough (top); Christine Nesbitt / Africa Media Online
(bottom)
Printed and bound by Interpak Books, Pietermaritzburg
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Contents
Abbreviations vii
Acknowledgements xi
1 Development Dilemmas in Post-Apartheid South Africa:

An Introduction 1
Bill Freund
2 Macroeconomic Policy and Development: From Crisis
to Crisis 32
Stephen Gelb
Part 1 The Minerals-Energy Complex and its Woes:

A Problematic Growth Path 63
3 Environmental Injustice through the Lens of the Vaal
Triangle: Whose Dilemma? 66
David Hallowes
4 Development Dilemmas of Mega-Project Electricity and
Water Consumption 94
Patrick Bond and Molefi Mafereka ka Ndlovu
5 Darkness and Light: Assessing the South African
Energy Crisis 116
David Fig
Part 2 The State as the Agent of Change: Conflicts over

Implementation 137
6 Planning and Land-Use Conflicts amidst the Search for
Urban Integration: The Case of Wingfield 139
Edgar Pieterse
v
7 Unintended Consequences: Development Interventions
and Socio-Political Change in Rural South Africa 173
Mary Galvin
8 Social Citizenship and the Emergence of the New Social
Movements in Post-Apartheid South Africa 195
Buntu Siwisa
Part 3 Struggles over Resources and the Land 219

9 ‘Doing Business with a Development Ethic’: ‘New Look’
Land Redistribution in South Africa 220
Deborah James
10 Development by Decree: The Impact of Minimum Wage
Legislation on a Farming Area in North West Province 248
Astrid Boehm and Stefan Schirmer
11 Land Claims, Land Conservation and the Public Interest
in Protected Areas 275
Cherryl Walker
12 Agrarian Interventions: Corporate Biogenetics on the
Makhathini Flats 299
Harald Witt
Part 4 Household Interventions: Gender Issues 325

13 Social Justice, Care and Developmental Welfare in South
Africa: A Capabilities Perspective 327
Shireen Hassim
14 Decentralising Gender Rights and Entitlements through
Integrated Development Planning? 348
Alison Todes, Amanda Williamson and Pearl Sithole
15 Rights and Redistribution: Thinking about the State, Gender
and Class in South Africa after the 2006 Zuma Rape Trial 372
Mark Hunter
Notes on Contributors 403

Index 407
vi
Abbreviations
AFRA Association for Rural Advancement

ANC African National Congress
APF Anti-Privatisation Forum
ASGISA Accelerated and Shared Growth Initiative for South Africa
BEE black economic empowerment
BIG basic income grant
CBD central business district
CBO community-based organisation
CCT City of Cape Town
CDC Coega Development Corporation
CDM clean development mechanism
CEPPWAWU Chemical, Energy, Paper, Printing, Wood and Allied
Workers’ Union
CMC Cape Metropolitan Council
COSATU Congress of South African Trade Unions
CPA Communal Property Association
DEAT Department of Environmental Affairs and Tourism
DEPP Developmental Electricity Pricing Programme
DLA Department of Land Affairs
DME Department of Minerals and Energy
DPW Department of Public Works
DRDLR Department of Rural Development and Land Reform
DST Department of Science and Technology
DWAF Department of Water Affairs and Forestry
EIA environmental impact assessment
EMT executive management team
EPWP Expanded Public Works Programme
ESTA Extension of Security of Tenure Act
vii
GATS General Agreement on Trade in Services
GATT General Agreement on Tariffs and Trade
GCIS Government Communication and Information Services
GDP gross domestic product
GEAR Growth, Employment and Redistribution
GMO genetically modified organism
GNUC Greater Nelspruit Utility Company
ICGEB International Centre for Genetic Engineering and
Biotechnology
IDP integrated development plan
IDZ Industrial Development Zone
IEC Independent Electoral Commission
IFP Inkatha Freedom Party
IMF International Monetary Fund
INR Institute of Natural Resources
ISAAA International Service for the Acquisition of Agri-Biotech
Applications
JDA Johannesburg Development Agency
JPC Johannesburg Property Company
JPTC Joint Permanent Technical Commission
JW Johannesburg Water
KCDF Kanana Community Development Forum
KLA KwaZulu Legislative Assembly
KW kilowatt
KZN KwaZulu-Natal
LCC land claims commissioner
LGNF Local Government Negotiating Forum
LHDA Lesotho Highlands Development Authority
LHWP Lesotho Highlands Water Project
LPM Landless People’s Movement
LRAD Land Reform for Agricultural Development
MNF Metropolitan Negotiations Forum
MOU memorandum of understanding
MRF Metropolitan Restructuring Forum
MSDF Metropolitan Spatial Development Framework
Muni-SDF Municipal Spatial Development Framework
MW megawatt
viii
MWP mass workers’ party
NCPT Ndabeni Communal Property Trust
NEDLAC National Economic Development and Labour Council
NEPAD New Partnership for Africa’s Development
NERSA National Energy Regulator of South Africa
NGO non-governmental organisation
NHF National Housing Forum
NLC National Land Committee
NMBM Nelson Mandela Bay Municipality
NWM New Women’s Movement
OBE outcomes based education
OECD Organization for Economic Cooperation and
Development
OFWCC Orange Farm Water Crisis Committee
PAETA Primary Agriculture Education and Training Authority
PBMR pebble bed modular reactor
PJ petajoule
PM particulate matter
PMG Parliamentary Monitoring Group
POPCRU Police and Prisons Civil Rights Union
PWR pressurised water reactor
RBM Richards Bay Minerals
RDP Reconstruction and Development Programme
SAAPAWU South African Agricultural Plantation and Allied
Workers Union
SACP South African Communist Party
SAGENE South African Genetic Experimentation Committee
SANCO South African National Civic Organisation
SANDF South African National Defence Force
SAPA South African Press Association
SAPPI South African Pulp and Paper Industries
SDCEA South Durban Community Environmental Alliance
SETA Sector Education and Training Authority
SLAG settlement land acquisition grant
TRIM Trade-Related Investment Measures
TRIPS Trade-Related Aspects of Intellectual Property Rights
TRS total reduced sulphur
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UDF United Democratic Front
UIF Unemployment Insurance Fund
UPRU Urban Problems Research Unit
VEJA Vaal Environmental Justice Alliance
VOC volatile organic compound
WTO World Trade Organization
x
Acknowledgements
This book is intended to showcase the thinking that has gone on during
recent years in what was once the Department of Economic History,
University of Natal, Durban, and is now the Economic History and
Development Studies Programme, School of Politics, University of KwaZulu-
Natal. We would like to thank all who have contributed to making the
institution’s activities worthwhile, including two members of staff who did
not write anything for this volume but attended our workshop, John Blessing
Karumbidza and David Moore. Our workshop and publications costs have
been generously borne by the Johannesburg office of the Ford Foundation.
This has enabled us to bring to Durban the authors of papers included here,
as well as two remarkable writers on development issues in Africa: Henry
Bernstein of the School of Oriental and African Studies, University of
London, and Bob Shenton of the Department of History, Queens University,
Canada, and we thank them for making that event so successful. For his
part, Bill Freund would also like to thank Neil Coleman for making COSATU
documents available to him and Frank Sokolic for the frontispiece map.
xi
Development Dilemmas in Post-Apartheid South Africa 1
Development Dilemmas
in Post-Apartheid South Africa
An Introduction
BILL FREUND
WHILE DEVELOPMENT STUDIES have proliferated as a subject for study,

the nature of what development is, or might be, has faded into the
background. It has become easier to provide a sunny and essentially moral
definition of development that links up to psychological notions of well-
being and health, as well as to idealised participatory formulations of
democracy. Development in these terms must involve everyone, including
the most disadvantaged, and it must take everyone forwards in a self-conscious
win-win process. Amartya Sen has seduced us into seeing development, real
development of course, as a process which will overcome the ‘unfreedom’
from which humankind (the same humankind that Rousseau discovered in
the eighteenth century lay everywhere in chains although born free) so
generally suffers – a ‘momentous engagement with freedom’s possibilities’,
as he concludes his widely applauded Development as Freedom (Sen 1999).
This is the attractive side of so-called neo-liberalism, its emphasis on human
rights.
However, as soon as we ask why and how questions about development,
we are very quickly led back to the real history of capitalism together with its
antecedents and its broader context. Any serious economic historian cannot
but also consider the dark side of capitalism’s rise. Karl Marx remains the
master proponent of the classical view arguing that this emergence was
signalled in blood and tears and mastered by individuals bent on overcoming
mores – age-old moral principles embedded in social belief. At home there
was the immensely destructive process involved in separating cultivators from
1
2 Bill Freund
the land, proletarianisation, by which means a working class was formed.

Overseas commerce involved exploitative exchanges and, at their worst, the
slave trade and the revival of slavery under commercial auspices. If immensely
dynamic and capable of fuelling previously unthinkably rapid economic
growth, capitalism was also marked by intensified new class antagonisms
and a system of market-led exploitation. Marx was not especially sentimental
about what had preceded capitalism, but he was certainly aware that there
was enormous loss and hardship in its ruin. Historians such as E.P. Thompson,
writing for England (and, of course, his innumerable acolytes and followers),
have powerfully captured ‘the world we have lost’ in deepening our grasp of
the economic macro-processes (Thompson 1963). Why should these losses
be consigned to a half-forgotten past? Does not capitalism need to recreate
itself over and over in ways that often mimic its beginnings once profits
falter?
Simultaneously, however, almost any writer on development is at least
dimly aware that economic development itself is hardly just a simulacrum
for economic growth as measured in raw statistics.1 Those statistics may be
in fact flagging investment within a limited enclave of marketised activity,
the successful mining enterprise or cultivation of a particular cash crop in
some colony, which emerges in a wider context that is superficially traditional
or unchanging. While obviously allowing some to prosper or create wealth,
such enclaves are too isolated or too focused on some foreign-generated
activity to have large-scale social and economic effects on a territorial or
national economy. Many writers have pointed to the contrast between Ghana
at the time of its independence in 1957 and, on the other side of the world,
South Korea, recently coming out of a ferocious and destructive civil war
with heavy international involvement. They both had similar per capita
incomes according to conventional statistical measure. But in Ghana, these
incomes were tied into the wealth based on foreign-owned mines and on the
growing of cocoa trees, whose fruit was at its peak in terms of the prices it
fetched. This, together with the felling of tropical forest, proved to be a very
inadequate basis for further accumulation (Amin 1973).2 By some measures,
Ghana has not advanced much in the subsequent half-century. By contrast,
Korea was beginning a far-reaching national process which has led to broad-
based wealth accumulation, as well as the creation of some great fortunes
and dramatic improvement in social indicators for the majority. In classic
form, moreover, Korea has ceased to be a peasant nation and most of its
population now live in cities and, if they are of working age, likely to be
represented on a payroll. Industrialisation and urbanisation have taken over
(Amsden 1989). The Republic of Korea’s weight in world affairs is much
greater than that of aid-dependent Ghana.
The point here is that, whether or not we term it ‘freedom’, there is a
very broad awareness in this line of thinking that development must involve
an economic core, but is not narrowly economic alone. There is some
transformational process that Korea has experienced which Ghana has not.
Moreover, and equally importantly, if countries such as Korea and in their
day Japan, Germany, France or Britain ‘developed’, it was a process that
contained suffering as well as ease, loss as well as gain, although certainly
some historic experiences have been less painful than others. Development
is not a win-win situation. There is very little reason to think that further
economic changes will not bring similar wrenching transformations.
To use the word ‘capitalism’ in this text is not intended to suggest that
socialism, state-led development, is immune to these bittersweet processes.
The harsh history of the Soviet Union was for its time an amazingly rapid
process of developmental formation, transforming basic features of the lives
of the population that bears this out most acutely. The processes of
industrialisation in post-war east-central Europe (especially the countries with
low living standards and little modern industry previously) and the convulsive
changes going on today in China also make this obvious. In this context,
talking about modernisation or industrialisation might be more justifiable
than capitalism, if more open to different interpretations; these terms were
once more frequent and more consistently used than development – and
not without good reason.
In South Africa, given the poverty to which the large majority of black
people were born within sight of apparent development and affluence, it is
understandable that people are reluctant to tabulate the dark side of
development in their anxiety to grasp the good things of life; most articulate
commentators very much want to hold onto an idealised notion of the past
– indigenous knowledge, so-called ubuntu – and imagine that it can cohere
with development. Writers who are broadly critical of the ideology and
practice of development are of interest to only a few and their critiques
unfortunately passed over far too readily.3 A rare exception, however, that
can be superficially taken as merely a critique of development hucksterism,
but actually runs deeper, infuses the work of perhaps black South Africa’s
4 Bill Freund
most eminent living writer, Zakes Mda (see, for example, 2000). Mda explores
wittily and observantly the foibles of development, South African style.
This book, which does not aspire to any easy fix on attaining development,
wants to introduce the subject to readers especially by proposing that
development is a process, not an event, and it is fraught with failures, with
tension and with loss as well as gain, in South Africa as much as elsewhere.
It also wishes to remind readers that development has been a historic process
and its particular characteristics have a great bearing on the present, both
because of the consequences of the past that are still with us and because
patterns of accumulation in the South African economy are often still
ploughing the furrows laid down during its classic period of industrialisation.
This is not an anti-development account, however. Without seeing
modernisation as a painless or contradiction-free process, it essentially
advocates unashamedly for a process of modernisation that runs deeper than
what has been so far promoted. It leans towards seeing exclusion from change
as being worse than participation and tries to promote participation on as
wide as possible a basis.
It does mean as well to open up debate on what a genuine transformation,
not merely an exchange in the racial leadership of the society or a disastrous
slump fired up by chauvinistic racial nationalism as in contemporary
Zimbabwe, might be like in South Africa. This introduction is not really the
place to debate those processes in detail, but it seeks at least to restore to
importance a few major ideas which must govern such a transformation.
* * *
We might start with Thabo Mbeki’s well-known 2003 speech as president of

the country reinserting economic dualism as the chief way of understanding
South African society. Here he proclaimed the existence of two distinct South
African economies. On the one hand, there is a reasonably well-educated,
dynamic, adaptive society that is well situated for further advance in the
global division of labour. This society remains largely, if no longer entirely,
white, a point Mbeki thinks of the greatest importance. Then there is the
large world of poverty, exclusion and humiliation which remains the lot of
most, if far from all, black people: the ‘second economy’ (Hirsch 2005).
Mbeki here essentially revives the dualist approach which dominated
the vision of critical liberal economists in the apartheid era (Houghton 1971
or, for a more subtle interpretation, Nattrass 1981). At some level, this is the
common wisdom everyone sees and senses if they walk South African earth.
There is the temptation to compartmentalise two historical processes entirely,
one successful and normal and one unsuccessful and diseased, and to see
South Africa’s problem as one of ‘uplift’ where well-meaning social transfers
will take the second economy up to the level of the first.
But what is the relationship between the two economies? The radical
critique, which started in the late 1960s, aimed at dismantling dualism
entirely. In a particular moment which helped to define the launching of
that critique, the late Harold Wolpe raised this connection. Cheap labour,
propped up through the maintenance of a section of rural South Africa
along so-called tribal lines, was precisely what fed and made possible the
systematic, profitable pursuit of deep-level mining, which in turn provided
the capital that was applied to the creation of a modern state and directly
and indirectly fed the industrialisation of South Africa through the first half
of the twentieth century. It was the migrant labour system, especially on the
mines, which established this connection. Wolpe, however, argued that rural
South Africa was becoming less and less capable of sustaining cheap labour
paid below reproduction level. In his view this is why apartheid was instituted
under the National Party government, determined to preserve whites-only
rule intact: that is to say that Bantustans replete with subaltern elites and
development policies needed to be created in the hopes of propping up the
system and keeping black people in large numbers at a distance from the
cities (Wolpe 1972). It would not be unreasonable to see this as the most
stimulating and important idea in the development of sociology in South
Africa up to that time and much of what follows has essentially been a
commentary.
There are many qualifications and ramifications that follow these lines
but for the purposes of this introduction, four alone will be mentioned.
First, rural South Africa was categorised not only by land left to African
communal ownership and the stewardship of chiefs; most of it was in fact
owned by whites who relied on pre-capitalist social relationships, what can
be called – as long as we realise that the kindly associations with the word
need to be largely removed – paternalism. While wages have increasingly
entered into those relationships, as Astrid Boehm and Stefan Schirmer suggest
in Chapter 10 of this volume, they have never entirely replaced older ways of
organising life on the land. The legal basis for them was in some respects
6 Bill Freund
removed during the apartheid years but only entirely since 1994 and not
with the practical effects intended. Indeed, even in South African cities,
African townships were administered along authoritarian lines that echoed
the rural model, a pattern that broke down fairly definitively in the 1980s
but has yet to be replaced with a vibrant local government system.
Second, political scientists have been particularly indebted to the
polemical volume written by Mahmood Mamdani, Citizen and Subject:
Contemporary Africa and the Legacy of Late Colonialism (1996), which has placed
the duality of South African life on a somewhat different plane. In particular,
Mamdani makes clear that once modified to provide a cheap and reliable
system of law and order, the Bantustan system and its predecessors was not
merely a way to rule South Africa, but it also had profound implications for
the social system and the way individuals conceived their relationship to the
wider society. His fears that the ramifications of dualism could sink the
liberation project of the 1980s were fortunately not borne out but big
problems remain. For Mamdani, the question of how to transform subjects
into citizens has been fundamental to his understanding of the problems of
post-colonial Africa and post-apartheid South Africa. It is not difficult to
move a step towards the inference that it is only citizens who are going to
make the transition to a different and more prosperous way of life. The
assumptions about development, in fact, are about the creation of citizens.
In Chapter 8 of this volume, Buntu Siwisa conceptualises problems of
development implementation specifically in terms of the lack or breakdown
of what he calls social citizenship.
The other points to be drawn here are more directly economic. Third,
there is the hypothesis, associated with the work of Ben Fine and Zavareh
Rustomjee, contemporaneous with Mamdani, that South African economic
development is governed economically by the logic of a ‘minerals-energy
complex’ largely internalised by the state. While the effective large-scale mining
and processing of minerals required an infrastructure, at the technical heart
of which lay the generation and application of large quantities of cheap
energy, primarily derived from coal which has become a more and more
important mined commodity itself, this has created a set of connections,
forms of dominance and material relationships that define a particular
technical growth path within capitalism. Unlike some developing countries,
South Africa has never been a very effective producer of consumer
commodities and much of its industrialisation has served only the internal
market.4 Development has been paid for by and depended on the modalities
of deep-level mining (and what is required to keep it profitable), other
resource-extracting activities, and the tentacles of the financial empires created
by mining operations (Fine and Rustomjee 1996).
This brings us to the final, not unconnected point. The minerals-energy
complex has made possible a successful capital accumulation trajectory
sustaining a significant middle class, while excluding the majority of South
Africans from the perspective of all the conventional human resource
indicators. If we look at South African development from the point of view
of education and skills, it ranks amazingly poorly; this in turn relates to
what is frequently pointed out: the extreme inequality of the society, especially
measuring the bottom half of the population by most indicators against the
top decile (tenth) or two.5 For succinctness and elegance in understanding
this dire situation, readers can turn to Charles Feinstein’s 2005 economic
history and to Jeremy Seekings and Nicoli Nattrass’s systematic and
economically informed historical sociology (2005). Feinstein points to the
serious negative implications of this kind of growth path as it narrows despite
the wealth it has produced in the past. These last assessments have become
much clearer and much easier to make in the wake of the collapse since
1994 of the political fortifications guarding white rule that continued to
define the white minority as the unquestioned core population of South
Africa.
When we turn to these very real and big questions, it puts into a somewhat
new light much of the critical literature on the African National Congress
(ANC) government under Nelson Mandela (1994–99) and then Mbeki (1999–
2008). This literature, notably the often very powerful writing of Patrick
Bond and Hein Marais, has occupied most of the bookshop table (see, for
example, Bond 2000 and many subsequent books and articles; Marais 1998).
The chief weakness of this thrust of thinking in my view, apart from an
idealisation of what the ANC was like before 1994, lies in a tendency to
encourage conspiracy theories of subversion.6 My interest is to turn away
from a superficial, if by no means irrelevant, critique which sees the limitations
of ANC efforts at structural transformation in terms of some kind of
conspiracy or skulduggery on the part of white masterminds of evil, i.e. the
Washington Consensus of the International Monetary Fund (IMF) and the
World Bank and its multiple allies, and return to thinking about the classic
model of South African development that Wolpe, Martin Legassick and
others formulated and still others have pertinently elaborated.
8 Bill Freund
One might start by looking at the process through which Washington

Consensus thinking became so influential. Alan Hirsch, a long-time servant
of the ANC governments since 1994, has emphasised the need for a defensive
strategy for the fledgling democracy. South Africa’s increasing level of
indebtedness and its dependence on the good will of powerful conservative
states in a very right-wing world were perhaps here determinant (Hirsch
2005). Partly this reflected the collapse of the possibility of reliance on that
other world – the Soviet Union – which for many was no doubt a model in
the years in exile during apartheid. What took place there was not merely a
question of political collapse due to a lack of political democracy in the
Communist bloc. It also signalled changes in the way goods are produced
and their sale organised, changes that made the classic model of development
pinioned on capital goods industries and heavy-duty infrastructure one that
was increasingly out of date. At the same time, intensifying international
competition under the wings of ever larger Western-based corporations makes
it difficult to shelter from new trends in capitalism.
The ANC cadres in exile may also have been expecting that they would
eventually rise to power without any serious impediments in a glorious victory.
Relatively suddenly, they were faced with a very different model that required
a so-called elite pact, which could only work if based on compromise and a
capacity for moderation and absorption (Moore 2006; Ghai 1991). The few
key trained people, such as Mbeki himself and later finance minister, the
formidable Trevor Manuel, may have been driven by a hatred for National
Party rule and the apartheid system but they had simultaneously lost any
real faith in pursuing an autonomous radical economic model. And they
were suddenly the ones in command of the levers of power.
It is true that the Washington Consensus represented a widely available
and heavily sold discourse of knowledge and we all know – since Michel
Foucault, if we did not before – that knowledge, and control of knowledge,
is power. The diplomatic wisdom of an Oliver Tambo, who led the ANC in
exile, which worked hard to avoid any controversial policy commitments
that might cut into its solidarity campaigns, also worked against the formation
of cadres seriously planning reconstruction in a democratic South Africa.
Loyalty to long-serving individuals rather than to policies has been typical in
ANC governance, while the South African Communist Party (SACP) has
tended to confine its critical views to international solidarity issues and very
broad general perspectives not easy to pin down in practice. It is also true
that the dominant model won out against an essentially Keynesian (i.e.
redistribution orientated) left-wing policy agenda promoted by a far more
politically marginal set of economists – many of whom were, as the jibes had
it, only well-meaning foreigners.7
Many activists in South Africa thought that the Reconstruction and
Development Programme (RDP), a key instrument in promoting the 1994
election victory, largely designed by non-governmental organisations (NGOs)
sympathetic to the ANC, constituted a powerful focus for more radical change.
However, the RDP was a set of critical analyses of social circumstances in
South Africa that showed no way forward in terms of emphasis or priority
and no basis for independence from the larger context of a fiscally constrained
economic policy that from the beginning allowed only limited space for attacking
those circumstances. In particular, there was little attempt to forge economic
policies directly linked to structural transformation of any sort – ‘growth
through redistribution’. Indeed, the economic policies of the Mandela
government showed marked continuity with the planning paradigm proposed
under F.W. de Klerk, his National Party predecessor. Eventually the RDP
became an ill-defined unit in the Office of President Mandela and it was
subsequently dissolved.
The National Economic Development and Labour Council (NEDLAC),
in which the state was supposed to consult with civil society – i.e. community
organisations, business and labour – was at first promoted as a form of
corporate governance that might override conventional parliamentary
structures in pursuing transformational goals; it evolved quickly into at best
a moderately useful talk-shop with very limited influence on state policy-
making. Potentially, the trade unions and notably the Congress of South
African Trade Unions (COSATU) constituted a barrier to the state acting
on its own. An assessment of COSATU’s interventions after 1994 suggests
its importance for raising, on many occasions, and with reference to many
specific but key policies, a perspective that criticises assumptions about
competitiveness and globalisation as justifications for questionable legislative
decisions. COSATU has stood up for more action against unemployment, a
less business-orientated educational policy and generally more inclusive
policies that would benefit the working class. It has notably supported the
idea of a Basic Income Grant (BIG). Nevertheless, it is difficult to conclude
that it has the capacity, will or strength to formulate counter-policies that
10 Bill Freund
move from generalities to clear and differently aimed trajectories (see

COSATU 2004).
The chief problem with the Washington Consensus cannot seriously be
held to be financial rectitude; that has been a necessity for every type of
government in the longer term, including the Soviet Union in its heyday
and those influenced by it. The ANC was surely not wrong to concern itself
with the implications of dependence that growing indebtedness may have
brought about after 1994. The question is not how the state should become
a source of unlimited largesse but rather what end its rectitude serves, the
profits of banks and boards of directors or some structured national purpose.
The real limitations of ANC policy have not been the product of ill will or
corruption, although they certainly do involve the limited capacity of ANC
cadres untrained for promoting momentous shifts in the making of policy.
Implementation of policy is a large acknowledged problem in the new South
Africa. Implementation alone, however, is a superficial way of understanding
the dilemmas of development in this country, as we return to the key critical
studies identified above; the problems also lie, possibly more profoundly,
with conceptualisation.
However, it would also be incorrect to see South Africa’s post-apartheid
policies purely in terms of a Washington blueprint. Where local politics
dictated other solutions, they sometimes trumped so-called international
wisdom. For instance, of the institution of trade union legislation, that fiery
opponent of GEAR (Growth, Employment and Redistribution), the
instrument that came to be the red flag of Washington Consensus orthodoxy
inflaming the left, trade union leader Zwelinzima Vavi says:
Our interventions have made a significant difference. These include

the negotiation of a worker-friendly constitution, the adoption of
progressive labour legislation, including the promotion of trade
unions and collective bargaining, and the extension of basic
protection to the most vulnerable workers [and] the defense and
further consolidation of our labour dispensation in the face of
concerted attacks by business, and attempts to introduce retrogressive
amendments (COSATU 2004).
What could be more inimical to the way the World Trade Organization
(WTO) bureaucrats interpret globalisation?
Nor can the long shadow of the World Bank explain the emphasis, a
growing one, on redistribution through the spread of infrastructural services
or free homes, a set of policies that has met with mixed results and reception
but is hardly orthodox. According to the latest census calculations,
government grants are the main source of income amongst the poorest 50%
of the population – not salaries, not the informal sector and certainly not
peasant livelihood activities. On the one hand, South Africa’s unequal
property and income patterns are extreme, but on the other hand, Seekings
and Nattrass (2005) demonstrate that for a country of its income level, South
African redistribution patterns are unusually generous. Many critical
international NGOs talk about the downtrodden of the world who earn less
than $1 a day. All South African pensioners are entitled to an income, by
the standards of the exchange rates of the end of 2007, of about three times
that. Nor is this deviation particularly unique: shrewd international observers
have noted elsewhere that the apparently inevitable rules that govern
globalisation continue to show more leeway for clever holders of niches in
the international economy than this implies (Ong 2006).
One might point out that the terms of the debate shifted during Mbeki’s
second term in office: GEAR was no longer a cloak for policy. The Mbeki
government presided over sober deflationary budgets that promoted South
African business interests. However, GEAR failed to attract much foreign
investment or to protect the currency very successfully; for some years it was
marked by low economic growth figures, disinvestment and job losses, as
Stephen Gelb demonstrates in fact and figure in Chapter 2 of this volume.
With substantially lowered indebtedness and a return to moderate growth
figures after many years, the state has become more generous in its
redistribution policies and openly abandoned some aspects of the GEAR
period, notably the drive for privatisation, which in any event was quite
partial and arguably more about the enrichment of a class of black pro-ANC
entrepreneurs than a genuine interest in pushing back the state. Several
authors in this book, notably Gelb, consider the formal abandonment of
GEAR and the adoption of ASGISA (Accelerated and Shared Growth
Initiative for South Africa), which passed as a blueprint in the 2006–08
years at the end of the Mbeki presidency. However, the broad lines of policies,
which this chapter argues are not simply enforced by a Washington-based
conspiracy, have not changed and the challenges in the name of development
that the state faced in 1994 are certainly still with us.
12 Bill Freund
Probably the most insidious aspect of the supposed international

consensus has been its acceptance, as a permanent given, of a dualism that
bears considerable resemblance to the supposed double nature of the South
African economy. Internationally, even conservative and reformist notions
of development after 1945 contained the shadow, as suggested above, of
holistic transformation of society. The debate was over whether such notions
were realistic as opposed to more extreme makeovers based on political
revolution. Classic macro-studies considered the long-term trajectories of
such countries as Brazil and India and looked at the capabilities and class
character of the state in post-independence Africa. It was this debate that
was forcibly shut down after 1980. The language of development discourse
has changed in the West into one where structural changes of a deeper
nature are neglected or rejected as impractical and impossible and the social
side of development policy, the charity and hand-out element, is glorified as
‘poverty alleviation’ and turned into the progressive side of things with a
dualistic separation between the two.8 As Bob Shenton brought out in our
workshop discussions, international social work is tending to take over a
‘professionalised’ and ever less subversive development studies. Where once
the definition of development suffered from being too narrowly economic,
it is now impoverished by almost leaving the economic out entirely. For
South Africa, this is inimical. This is a country that needs a sense of
development that is holistic and is tied in closely to an understanding of its
broader social and economic history.
At a superficial level, who can disagree with Mbeki as with his liberal
predecessors? Dualism makes the greatest sense for any intelligent observer
of South African society. And with the demise of so-called Fordist labour
market practices in their South African form, with the restructuring of the
market so as to lead to a downturn in industrial employment (or at best
stagnation), isn’t a further problem the creation of a permanent underclass
unable to benefit from mobility and unable to mobilise effectively beyond
sharp, and sometimes very violent, local actions?9 The Marxist dream of a
unified working class, achieving consciousness of its potential through the
opportunities created by mass industrialisation, is not sustainable without
substantial modification. Scattered and often inchoate protest by the so-
called multitude might lead to populist leadership assuming power but is no
substitute for any coherent process of transformation.10 These same problems
are being faced by regimes with a deep interest in transformation, such as
those in Brazil and Venezuela, which also have substantial fiscal resources
(and far more dedicated and substantially trained cadres in various develop-
ment fields) but also struggle to find actual practical solutions suitable to
the global environment of the early twenty-first century. Internationally the
question of creating a better life and an effective new role as citizens, thus
enacting Sen’s vision of freedom, from the tens of millions emerging from
peasant worlds and so-called traditional cultural practices (who clearly are
not going to form communities based on industrial demand or on the basis
of patriarchal male-led families) is arguably the central problem of today’s
world, certainly the central human problem facing development as a practice.
In another sense too, Mbeki was certainly right: South Africa cannot
isolate itself from these general problems through inward-looking solutions
that disregard the deep connections our economy and society have with
changes in the larger world. We cannot recreate the past. Moreover, South
Africa, and here the government’s conception is equally valid, must also and
inevitably be the engine that takes at least the small and much weaker states
of southern Africa forwards. We have to learn from and interact with so-
called globalisation and to learn from successful interventions. This means
accepting that as much as globalisation offers opportunities, it also contains
dangers and raises new barriers to real transformation.
Thus I find much of the talk about ubuntu which assumes that the African
traditional inheritance contains convenient answers to the problems of
modern life soft, if not outright reactionary, a deflection away from the hard
issues. There is little salvation in ubuntu if we are seriously engaged in a
project of modernisation, even if indigenous local knowledge might at times
provide some with an attractive idiom for this process. Maybe it is mentalities
and ways of accessing knowledge, not shifts in tariff legislation or the
ownership of basic services, that have to give way. Mary Galvin, in Chapter
7 of this volume, suggests for instance that the possibility of major changes
at the micro-level depends on the extent to which there actually are new
forces from below willing to challenge custom, while in Chapter 15, Mark
Hunter reminds us that it is seizing forms of modernity that powerfully
engage the masses, rather than recoveries of tradition. The mass of southern
Africans will have to come to terms with the culture and mentality that goes
with that project, not only its mechanical and cybernetic materialities
abstracted from human agency and cultural change. The suggestion here is
that the writers above all believe intensely in the need for transformation to
14 Bill Freund
be first and foremost that sort of modernising project. This is the human
content of a new economic growth path – inevitably.
Perhaps the first point to make here is that there is a need first and
foremost for human agents of change on a large scale. It is going to be necessary
to develop cadres who can use the schools, the media and real local knowledge,
coming from or being stationed in every municipality, every significant spatial
community, to lead the modernisation drive that can help mould or stimulate
a population that can respond effectively to global trends. No mere computers
or tinned media voices can possibly act as a substitute. Plans, for instance, to
cope with the effects of the HIV and AIDS pandemic could include very
significantly ways of promoting biomedicine and an appreciation and general
understanding of science, as well as the formation of crèches and other
institutions that could serve as caregiving safety nets and generate new ideas
amongst large numbers of people.
There was much potential for the development of such cadres in the
United Democratic Front (UDF), the chief anti-apartheid vehicle of the
1980s. This was unfortunately snuffed out by its dissolution in 1994. The
UDF in the 1980s was a noisy and creative agency with substantial diversity
and the potential to engage a wide range of actors for change. In subsequent
years, activists have been absorbed and assimilated into an existing, at the
top end overpaid, civil service which lacks any serious transformative purpose
and which the state can discipline only with difficulty. By contrast, it is clear
that the youth is characterised by extremely high levels of anti-social behaviour,
criminality and a descent into AIDS infection. Indeed comrades in the 1990s
often retained their attraction to violence but dropped any kind of political
commitment (Krämer 2007).
Even those remaining completely dedicated to a struggle-based ideal of
transformation have increasingly had to operate within straitjackets that limit
their potential to generate new ideas and discussion. It is often said that
bureaucracies have this insidious effect on revolutions, and South Africa
(which cannot be said to have actually experienced a revolution) is certainly
no exception. In Chapter 6 Edgar Pieterse presents a masterful assessment
of why the state, to take a cliché, seems to lack the capacity to implement
fine ideals. He considers the limits imposed by the 1994 compromise, the
retention of informal influence by fixed interest groups and the extent to
which new interest groups have taken on the colour of the old within the
bureaucracies. There was a vision of what a transformed South African city
should be in terms of desegregation, compaction, access and opportunity

but no real mechanism has ever developed to override existing structures to
bring that vision to pass. Certainly the problems of implementation are
closely linked to the whip hand that imposes what Alison Todes, Amanda
Williamson and Pearl Sithole label centralised decentralisation (see Chapter
14) and often misreads the real needs of people at the base very substantially.
Galvin, at the opposite extreme of rural KwaZulu-Natal from the metropolitan
bounds of Cape Town that concern Pieterse, provides an important corrective
here; she stresses that whatever the good intentions of the state or of NGO
intervention activists, the ground has to be readied through a background of
activism and mobilisation for any kind of significant social change.
* * *
In the next few pages, a few key areas of weakness in a holistic developmental
project will be outlined. First and perhaps foremost is the character of South
Africa’s schools, a basic issue which is not discussed in any significant way
here, but is an essential underlying foundation. If we follow Feinstein and
insist that overcoming our deficiency in human capital, in the quality and
capacity of what South African citizens can do, education is basic. Yet, if we
go back to the much-vaunted RDP document of 1994 we will find that
education occupies less than a page, less space than the subject of sport.
Moreover there is a crude assumption that what is at stake is simply equalising
the educational budget, not the standards, discipline and orientation of the
schools. This is astonishing. On the one hand, while all schools get equal
state subsidies, those subsidies are very small; the successful schools
overwhelmingly depend on massive private subsidisation by parents. The
absorption of the large Bantustan and Department of Education and Training
education establishments into a deracialised system without any ethos of
discipline and upgrade, without any culture of scientific inquiry, has largely
been a failure. Graeme Bloch, once a prominent intellectual associated with
the Cape Town UDF, began a recent article in the Mail & Guardian of 1–7
February 2008 saying, ‘South Africa must face up to the fact that our schools
are a national disaster’. This has more recently been stressed as well in speech
and writing by Mamphela Ramphele, a former doctor and anthropologist,
ex-vice chancellor of the University of Cape Town and most recently of the
World Bank. A recent survey of secondary schools in dozens of countries
16 Bill Freund
focusing on mathematics and science was unable to find anywhere in the

world, including on the African continent, which ranked lower in achievement
than the so-called Model A schools (Reddy 2006). A regional research survey
by the South African Institute of Race Relations explored the fact that ‘South
African [primary] schools are among the worst in Africa’, examining English
as well as quantitative skills. Although this was stated in Business Day of 8
November 2008, such information is not often brought to the attention of
the public; international comparisons are embarrassing.
We now have an education budget in which 90% goes to salaries. The
limited bureaucratic controls on competence and performance have largely
disappeared as an apartheid shackle. Model C schools, permitted to sustain
far higher quality education based on fee payment agreed to by self-
perpetuating parental communities, teach a significant number of black as
well as white students, but inevitably only cater to a relatively small minority
and perpetuate the painful inequality of the past in a form only questionably
less stark.11 As a result, only a very thin trickle of young people coming out
of these systems have the skills or mentality that will allow them to operate
effectively in the kind of career jobs, administrative and technical situations,
which can actually carry not only the country but also themselves and their
families forwards. This couples with ANC racial policies that insistently
promote blacks to such jobs in the public sector and are obsessed with
removing white males from decision-making positions of power. Through
pressures exemplified by the voluntary but heavily touted black economic
empowerment (BEE) system, which tries to promote black participation in
business ownership and management, even the private sector is substantially
affected. This is a formula designed to promote mediocrity and corruption.
It would be unfair to surmise that ministers of the calibre of Kader Asmal,
Naledi Pandor and Blade Nzimande working in education policy are unaware
of the situation, but there is thus far little general willingness to understand
that it represents a crisis and that its resolution is central to any kind of
serious development strategy.
A second area for debate is urban policy, which is touched on by a number
of our contributors. The ANC government has opened the cities up to all
with complex consequences. Moreover, the rapid growth of a black middle
class and the demographic decline in the white population are opening up
city life to previously excluded elements while established townships,
especially in the bigger cities, have greatly increased their social amenities
and profited from the extension of urban infrastructure. In Johannesburg

especially, the ANC must also be credited with major efforts to revive a
decayed city centre. There are successes in changing existing patterns up to a
point.
However, there is certainly a need to redirect urban policy in terms of
integration of the working class into city life more fully. One aspect of this is
the increasingly noted contradiction whereby the state fails to provide mass
employment or some substitute payment while expecting the public as
consumers to pay for impressively extended services. The most recent state
community survey highlights achievements in terms of primary school
attendance, access to piped water and flush toilets. Here overall figures for
South Africa are now approaching the highest levels attained in countries
generally defined as Third World. Yet poor advice from so-called international
best practice dominated by corporate influence goes hand in hand with the
greed of those benefiting from state contracts to create a situation which is
not merely illogical but brings about bitter, often violent, resistance that has
actually led to significant loss of life in recent years (McDonald and Ruiters
2005; Ballard, Habib and Valodia 2006). Here the interests of new
accumulators, as well as existing corporate interests, rather than those of the
broad public, dominate. For some observers, such as Patrick Bond and Molefi
Mafereka ka Ndlovu in Chapter 4 of this volume, the answer lies in a new
politics based on popular resistance. By contrast, Buntu Siwisa, in Chapter
8, looking at struggles over the provision of reticulated clean water, while
aware of the failings of the state’s delivery roll-out, is equally sceptical of
these politics, thinks they are partly headless and partly self-serving and sees
the answer elsewhere.
There is an urgent need to create a workable system that poor people
understand as fundamentally just and also provides for the sustainability of
service infrastructure. Apartheid was by definition a spatial policy that
assigned room to people based on their skin colour, eventually modified to
some extent by income. Inevitably the end of apartheid tied into pressures
for significant human movement that reflects the perceptions of South
Africans as to where they can provide themselves with a better living. It
hardly seems necessary to explain that this inevitably attracts them to cities
with rapid economic growth rates. In particular, the cities of Gauteng
province, especially Johannesburg and Pretoria, and the Cape Town area
18 Bill Freund
have experienced rapid in-migration since 1990 although the patterns of

human movement in South Africa are quite complex. How to expedite the
urbanisation of new layers of people with more ambition and hope than
resources? How to turn migrants into citizens who can understand how to
participate in representative forms of government? How to create a symbolic
language of participation and inclusion that accepts the need to compromise
between the urges of different classes in society? These problems are also in
desperate need of action following more integrated thinking with strong
developmental implications for the burgeoning cities.
If education policy is bedevilled by the felt need of the ANC to empower
teachers and administrators from a mediocre and essentially dysfunctional
system and to move extremely fast on placing cadres in positions that exude
status and power, the same could be said of housing policy to some extent.
Mbeki often made his feelings clear: housing policy, and this has meant the
construction of perhaps two million so-called RDP houses, must foreground
the need for black people to overcome the humiliation of living in shacks.
Having houses that, as much as possible, mimic white suburban houses in
respectability is the priority. The problem is that the inhabitants so often
lead very irregular family lives with unpredictable incomes and a scarcity of
stable jobs: they simply lack the money to sustain suburban comforts. The
result are uncomfortable compromises: houses that are sometimes poorly
constructed, very small and inevitably located on the cheapest land the state
can find, sometimes very inconvenient for participation in the urban economy.
The taxi revolution (which of course has empowered a stratum of black
entrepreneurs and employs many black drivers) has driven out thoughts of
an integrated public transport policy which would serve masses of people
and tie cities or regions together in line with a housing policy.
It was in the second Mbeki term that the minister of housing, with
claims at a breakthrough in new policy, launched the Gateway scheme,
intended to create denser housing, economically sustainable for working
people, near the N2 freeway that leads from the airport to the city centre in
Cape Town. This has been a colossal failure thus far that exemplifies the
problems. The quality of the housing (built by the corporate private sector)
has been badly compromised and yet there is no stable working class (like
that which classically brought on genuine housing shortages as in post-war
Britain or industrialising revolutionary Russia) that can pay for sustained
higher quality. In the meantime, thousands of poor people who have been
squatting in what is termed the Joe Slovo informal settlement have been
displaced with the possibility only of removal to Delft, a distant Cape Flats
township notorious for poor-quality housing profitably built by the building
industry. In Chapter 6 of this volume, Edgar Pieterse, whose focus lies in
Cape Town, brilliantly captures the way incremental delivery has been
encapsulated in existing patterns of social division, even if racial exclusion is
no longer part of the agenda.
The government has yet to evolve effective rental property schemes and
it continues to cold-shoulder informal settlement upgrades on the assumption
that this is unworthy of the new South Africa. A realistic policy that can take
people forwards is needed. It might even be suggested that the state should
place its money into transport and direct employment creation rather than
following the chimera of handing out free houses in response to a supposed
housing shortage. Gateway symbolises this: as activists complain: ‘There is a
big open space between the existing N2 Gateway housing and our informal
settlement. This is where government wants to build bond housing for those
earning more than R7 500 a month, which is quite out of our range as many
of us are unemployed’ (Mzwanele Zulu in Amandla 2, October 2007). When
polled, members of the public invariably turn to unemployment and crime,
not to inadequate housing, as the most fundamental problems they see around
them. Perhaps their instincts at this basic level are correct? These contra-
dictions are certainly played out in the sphere of provision of electricity and
water reticulation, themes written about extensively elsewhere and in this
volume by Bond and Ndlovu and by Siwisa.
There is an argument that, by making many houses of this quality available
to poor women with dependents, a positive social benefit has ensued, but it
is one that does not connect to any wider sense of socialisation, as is pointed
out incisively in this volume by Shireen Hassim in Chapter 13, Mark Hunter
in Chapter 15 and especially by Alison Todes, Amanda Williamson and
Pearl Sithole in Chapter 14. Formal policies have to link up to initiatives
from below, NGO activities and locally based activists. They have to connect
to social policy that ties in to adult education and improved schooling as
well as health education and family policy but also, through surveillance
and building up neighbourhood ties, a struggle against the extraordinary
high rates of violent crime from which everyone suffers and which, taken on
a local or national scale, has a huge effect in braking economic development.
Crime rates must be assumed to stand as well for widespread attitudes to
20 Bill Freund
law and order which also need to change in order to allow for economic
development to diffuse and involve the population more widely.
It should probably be added, because it is not often acknowledged, that
statistics since 2001 suggest that unemployment, whether contracting or
expanding somewhat, is certainly expanding less than poorly paid
employment. The problem is not simply lack of jobs but payment according
to market relationships set up in earlier times, market relationships which
countless opponents of apartheid pointed out in studies that earmarked the
harsh forms of exploitation typical of the South African growth path. Labour
market policy continues to preside over a situation where jobs which are
genuinely unskilled, but also where skill is not recognised, are paid very
poorly compared to those affixed to educational qualification and status.
Why should cleaners or cashiers make so little compared to all white-collar
workers? If there remains a worker in this category absolutely central to the
economy, just as in Wolpe’s day, albeit less numerous and not tied in to
gold, it is surely the miner. Yet miners, often hired today on some kind of
contract basis, earn less in buying power than they did fifteen years ago, in a
job which is normally reasonably well paid in many countries. In Chapter
10, Astrid Boehm and Stefan Schirmer point to the problems created by
instituting a minimum wage which substitutes for paternalist relations but
does not actually create a living wage for farm workers. Minimum wage
legislation is in good part due to the intervention of COSATU, but it lacks
the ability to make a better way of life real in such situations; legislation is
not enough.
Over the past decade, more and more attention has been paid to the
idea of a skills shortage.12 The old apprenticeship system has virtually died
and the attempt by the state to create a work-related skills programme under
the aegis of the ministry of labour, the Sector Education and Training
Authorities (SETAs), has been adjudged by many as marginal and dominated
by ‘low-level training’ where modest bureaucratically set targets are relatively
easy to reach but also basically irrelevant (Johnston 2007). Again, the real
bull has yet to be grasped by the horns. Attempts through so-called outcomes
based education (OBE), a trend borrowed wholesale from far wealthier
countries, without anything like the apartheid inheritance, to make schooling
more practical have been poorly executed and are largely despised even within
the education bureaucracy itself; the kind of sophisticated project required
to make such a system work is not a current possibility in a country that
needs to work extremely hard on diffusing the traditional education basics.
COSATU, in the formative years of its components, struggled to create a

more humane world of work that could sustain a world of citizens (Friedman
1987; Seidman 1994). Cannot the relatively prosperous trading conditions
of recent years be used to resume progress in this direction?
But of course, not everyone can, or should be, living in the big cities.
Urbanisation policies that take South Africa forward need desperately to be
combined with integrated rural development policies that can improve life
for the majority of small-town and country dwellers. There is a need to
manage urban departures, to provide security and build livelihoods through
advancing non-agricultural activity and projects which in turn depends on a
systematic and well-informed state presence throughout the countryside.
Increasingly, rural policy has been equated with racially defined land ‘reform’,
despite an impressive literature that demonstrates how little land transfer
actually does, in isolation from a host of other necessary measures to empower
poor rural people (Walker 2004; James 2007; Ntsebeza and Hall 2007). The
needs of the rural poor can be measured, to quote our workshop guest,
Henry Bernstein, by the fact that African cultivators increasingly are becoming
too poor to farm. Here again the contradictory mesh of market-led philosophy
and the political urgency of redistribution clash; a central issue raised in
Chapter 9 of this volume by Deborah James. In Chapter 12 Harald Witt
points out additionally that technological fixes, ultimately benefiting some
market forces, remain an apparently solid but in reality ineffective way of
channelling rural transformation. Inevitably, secure life on the land requires
both very effective forms of farmer self-organisation and a myriad of state
interventions. You can’t take subsidies away from more marginal white
farmers, have them leave and then seriously expect equally or more marginal
black farmers to thrive under the same circumstances. Witt proposes, for
instance, the desirability of subsidising peasant farmers systematically. Rural
policy should move away from a simple exploitative view of available resources
to one that makes healthier use of that resource base, more varied and even
perhaps intensive. Rural life also has to build new connections with the city
and the national economy in ways that make it more attractive and
economically functional, not necessarily based on agriculture. Interestingly,
this is indeed happening for the well-resourced white middle class in favoured
regions, especially the hinterland of Cape Town stretching along the coasts
and into the Karoo, but it needs far more creative assistance to reach further
and start to build a better life for the majority of potential rural citizens.
22 Bill Freund
Instead, change in the countryside is often dominated by a racialised

fantasy of land reform (which, if genuinely developmental, ought strictly to
be about farm size or creating a more even playing field between owners and
workers, as suggested by Boehm and Schirmer), a moderate and somewhat
marketised version of the vengeful and economically disastrous fast-track
land reform taking place after 2001 in Zimbabwe. Transfers in land ownership
must be subordinated to a broader policy of struggle against rural poverty, a
diffusion of state cadres in the countryside, policing, use of media and schools,
promotion of modern ideas about health, equality between sexes, as well as
encouragement for rural people to organise themselves democratically and
securely.13
Security is important in two senses. The situation where economic activity
can barely take place due to a virtual collapse of law and order is one aspect.
We often read about farm murders: uncertain property relations and
widespread theft can also make most economic initiatives impossible in a
former Bantustan milieu (Hebinck and Lent 2007). In addition, while the
state needs to support black and white entrepreneurs so their tenure on the
land is less fragile through the formation of networks of public and private
partnerships, there is equally a need to support economically variegated
forms of living in rural areas. The countryside in the twenty-first century is
not going to be dominated purely by farm activities; allied and complementary
economic activities are already essential. It is also critical to remember that
large numbers of rural people live, and will continue to live unless they leave
the land entirely, in the former Bantustan homelands and their problems
certainly cannot be solved by transferring them to white-owned farms at
substantial distances from their present residences. Here again, needs are
distinctive in different areas, require more than just agricultural improvement
and tie in to the state’s dependence on Mamdani’s world of chief and subject
(1996; see also Galvin in Chapter 7 of this volume; Ntsebeza 2005; Oomen
2005). A focus on shifting land ownership from white to black without
being tied to wider reforms will merely recreate the impoverished living
conditions of the old ‘black spots’ of the early apartheid era. Integrated
rural development will exclude almost everyone if it is narrowly fixed on
creating black commercial farmers out of the current marginalised rural
population, as James stresses in Chapter 9. Wishing people from one side of
a divided society into another is just not good enough.
Democratisation of these areas requires a wide-ranging development

policy based on local knowledge.14 In this sense, the local economic
development philosophy current in international thinking, by allowing a
focus on the local and the particular, is a potential breakthrough although
its Eurocentric emphasis on the role of the private sector is completely
unrealistic in much of South Africa. Above all, we need to bring skilled and
intelligent people in large numbers into every municipality who can
conscientise them and convince people that change is possible, a tall order
of change that will take a long time to germinate.
This book also addresses the essential need to move from dinosaur project
development that fitted the minerals-energy complex model but whose
deficiencies in terms of environmental cost and increasing technological
backwardness, as well as their inability to employ large numbers of less-
educated South Africans in those forms that are typical of contemporary
conditions, are increasingly obvious. It could be said that South Africa has a
strong tradition of a developmental state aimed at harmonising the interests
of the private sector and the public as the state defines it, but the modalities
that governed that way of operating are increasingly directing us in ways we
should not want to be replicating. Bond and Ndlovu, David Hallowes and
David Fig in this volume give us powerful markers pointing the way here.15
The new South Africa should not be about replacing white with black
executives, but about thinking through new alternatives to, for example, the
intensifying pre-1994 emphasis on a wide-ranging high-quality arms industry
that built on the social skills typical of the world of apartheid (Henk 2006).
This is becoming more obvious in terms of the gradually deepening
international energy crisis, which casts cold comfort on industrialisation
based on subsidised and energy-intensive coal fuel. Backward South African
executives have treated green innovation as some kind of incomprehensible
politically correct fashion; new ideas here have come to the fore very late.
The South African electricity shortages manifest from 2006 onwards
and reaching crisis proportion at the end of 2007, considered in Chapter 5
by Fig, have finally brought home this folly, as well as the extent to which
South Africa falls behind countries likely to bring about key changes to their
benefit with reference to energy and global warming. Fig observes South
Africa moving from very limited interests in large-scale plans for renewable
energy to panic planning on an uncertain knowledge base when suddenly a
public clamour arises. Plans for dinosaur mega-projects that belong to the
24 Bill Freund
minerals-energy complex past, such as the aluminium plant intended to be

the key economic investment in a huge project to build up Coega harbour
near Port Elizabeth (which will guzzle cheap energy, provide a handful of
jobs but bring in an initial thrust of foreign investment with easy profits for
various contractors), may have to be put on ice.
In this volume, we have consciously taken environmental issues very
seriously. In Chapter 3 Hallowes paints a poignant picture of the costs of
development in one region in terms of human well-being, notably in the
field of health, and in the future of a vulnerable landscape, in terms of what
he calls ‘environmental justice’. In Chapter 4 Bond and Ndlovu remind us
of the key importance of national water policy on a dry sub-continent, which
may become drier as global warming intensifies. In Chapter 11, Cherryl
Walker, known for her commitment to land restitution, suggests that there
are cases, here looking at Lake St Lucia, where the general good of maintaining
environmental standards should override both business interests and those
of groups hoping to claim particular benefits for themselves from politicised
resources. Corporate interests, largely international at source, promise a better
future for small farmers in a context where the chemicals they produce become
a required part of agriculture. However, as Harald Witt points out in Chapter
12, given the vulnerability of the land and the difficulties small farmers face,
innovations need to be very thoroughly monitored and considered with
scepticism. His views coincide with those of Fig and with Ndlovu and Bond
over the dependence of the South African growth path on ‘techno-fixes’
(quick fixes derived from apparent technological miracle innovations).
Several of the contributions in this volume put an important emphasis
on gender issues, and rightly so, since they are absolutely vital to the direction
of social change. There is a clear need to give equal opportunities to women
as independent actors in ways that can also nurture young people in secure
environments. Areas of policy such as housing and the labour market are
vitally important here. Gender equality is promoted strongly in the South
African Constitution and there is a continued need to give life to these
ideals by taking seriously and targeting the actual gender environment in
this country. But the social context of production requires systematic thinking
about social reproduction rather than women’s representation in Parliament
and other bodies whose individual leaders earn big salaries. Women’s rights
and the empowerment demands of the ANC Women’s League are not
enough: there is equally the need to develop social and family possibilities
that promote the raising of children in ways other than handing young people
over to grandparents, into providing crèches, schools and other institutions
that have a real educative function and that create a stable basis for life in
spatial communities where market value dominance has so far only offered
poverty. Alison Todes, Amanda Williamson and Pearl Sithole, Shireen
Hassim, Deborah James, Mark Hunter and others consider the issue of gender
in South African development from a number of different angles and show
that what exists now is only a reduced and dehumanised skeleton of a vision
of equality. The problem lies not with rights talk, which, as this introduction
emphasises from the start, coincides well with neo-liberalism to whose most
attractive aspect it speaks. However, rights talk does not make interventionist
social policy happen by itself. It is also true, and this reiterates a theme that
underlines most contributions in this book, that there is virtually no feminist
movement on the ground to develop strategies and frame demands that
would forward women’s interests and improve gender relations. Hassim is
perhaps the most prominent amongst those who have defended the view
that a significant women’s movement had a real impact during the key trans-
ition years, but she joins others in seeing those embers largely extinguished
now (Hassim 2006). The authors collected here differ on the centrality of
autonomous movements from below in sympathy with debates internationally,
but they clearly have an important, even if insufficient, role to play.
In the last two years of its tenure, the Mbeki government signalled a
declining confidence in the potential of foreign investment and privatisation
and advertised itself as promoter of industrialisation with state-led impetus
welcomed. In early 2008, it became obvious to the public that electrical
provision for maintenance, let alone development, in South Africa was in
serious trouble as a result of a wave of enforced power cuts. The failures of
privatisation have, according to many critics, had much to do with the failure
of Eskom, the national electricity parastatal whose policy debates focused
for years on planning for privatisation, not fulfilling national power needs
effectively. However, this message has so far not achieved much compared to
the juggernaut represented by Trevor Manuel’s ministry of finance (now
Pravin Gordhan’s) and its overall scepticism towards solutions outside the
international financial institutions’ market perspective. The developmental
state, if one can return to this paradigm which was probably most effectively
carried out in the 1940s and 1950s in the interests of a development path we
26 Bill Freund
are now in some respects rejecting, will require far more than rhetoric to
take on some reality. Ben Fine has recently commented on the promotion of
the idea of a developmental state by stressing:
the close relationship between gold, iron and steel production still
remains at the core of South African industry . . . policies have
continued to make financial speculation extremely profitable as
opposed to leading economic activity . . . a determination to succeed
also requires a political conflict with those in control of the economy
(Amandla 2, October 2007).
It can be argued, moreover, that the conflict would be not merely with the
captains of industry but also potentially with the BEE appointees who are
now equally dependent on the existing system rather than, as may have been
intended, a new breed of South African capitalist. This is not to gainsay the
importance of the return of the developmental state to the stage as a debating
point. What choices will now be made as the Mbeki era ends?16
Gelb, Hassim, Pieterse and the minerals-energy complex critics in this
volume all in one grand sense write the same thing: the dualism that concerns
Mbeki rhetorically is not really being challenged; changes taking place are
welcome, real and significant but occur on a market-dominated growth path
that reproduces that dualism as a matter of course. Many of the contributors
here are comfortable using the term ‘neo-liberal’ to describe this context. By
contrast, this introduction promotes the need for a vision that integrates
change in the first and second economies in defiance of the dichotomy
between an idealised version of market-led, globalisation-friendly business
growth and a charitably intended poverty alleviation, turned into a substitute
for development. One needs devoted cadres who work for the government
as well as all manner of independent agents for change on the ground. The
long-term goal is actually finding what struggle literature once loved to address
as ‘the way forward’, long-term plans that build. As a matter of course, this
approach must accept that what is desirable is a tall order that will take a
very long time and always face contradictions. The development of a large
community of individuals able to study and debate development issues in
South Africa is itself a major task that has a very long way to go, although it
has advanced if one observes public discourse over the years since 1994.
This is the first stage which this book means to stimulate. However, the
consequences of faltering in political and developmental terms and of

foreshortening understandings of transformation into simply exchanging a
capable but very conservative white bureaucracy for a black one without
clear moorings might not merely build antagonisms and stifle possibilities
but, on reaching a dead end, bring about historic regression.
This introduction has tried merely to suggest and not to reiterate the
many-sided and rich contributions here but it is only an introduction;
hopefully the chapters that follow open up more space for advancing debates
and a learning process while restoring concern for the big questions inherent
in South African development issues.
Notes
1. This understanding became more prevalent from the 1970s onwards (see Arndt
1981).
2. Although much that is very interesting on colonial and post-colonial economic
activity in the Gold Coast region and elsewhere in West Africa has been written
since, Amin’s schematic critique of the cash-crop ‘miracles’ of West Africa has
never been bettered for clarity as an introduction.
3. For an internationally well-known example, see the collection edited by Majid
Rahnema and Victoria Bawtree (1997). For some powerful assessments of where
development comes from, see M.P. Cowen and R.W. Shenton (1996) and Gilbert
Rist (1997).
4. Not so surprisingly, the biggest success in South African consumer capitalism has
been the growth and virtual monopoly role of South African Breweries, now one
of the biggest international players in beer brewing. The forthcoming work of
Anne Mager will make this story clearer.
5. The well-known Gini co-efficient measures the relationship between the top and
bottom deciles.
6. Although to be fair, the new version of Marais being published has little left of
this and Bond too has shifted towards a more internal and theoretical orientation
in his numerous more recent publications.
7. For a defence, see Jonathan Michie and Vishnu Padayachee (1997). Padayachee
was among those involved in the Macroeconomic Research Group (MERG).
8. Obviously those working in this paradigm have contributed important micro-studies
and are by no means without insights of their own. If the critique of the Third
World state has gone much too far and is often extremely crude, understandings
of its real limitations and foibles have been enriched by the anti-statist phase so
fashionable in the 1980s and 1990s especially.
28 Bill Freund
9. For a thoughtful introduction to changes in the industrial labour market, see Eddie
Webster and Karl von Holdt (2005) and Franco Barchiesi (2007). Von Holdt’s
Transition from Below is an excellent monographic introduction to the subject (2003).
For a longer assessment of the social movements in urban areas, see my essay ‘The
State of South Africa’s Cities’ (2006).
10. For a sympathetic attempt to theorise the empire and the multitude, see Michael
Hardt and Antonio Negri (2000).
11. This aspect is captured in the work of, for instance, Linda Chisholm (see 2007)
but redress only partly captures the problem.
12. The work of André Kraak on skills is particularly useful; for example, see what he
and others have written in McGrath et al. (2004).
13. For an important essay that makes this point but takes a somewhat different tack,
see Stephen Greenberg (2003). The situation on white-owned farms is handled
with breadth and depth by Doreen Atkinson (2007), a work focused on the southern
Free State. Her ideas parallel those of Boehm and Schirmer on many points.
14. For an impressive survey that considers possibilities, with reference to the former
Ciskei, see Hebinck and Lent (2007).
15. For a more conservative but very well-researched consideration of energy issues,
see Winkler (2009). He emphasises that no potential solution is comprehensive or
ideal. Electric power in particular is considered by a wide range of authors in
McDonald (2009).
16. The same issue of Amandla also highlights a long interview with the newly appointed
deputy minister of trade and industry, Robert Davies, who certainly promotes
encouraging ideas along some of the lines suggested in this introduction. His
appointment and subsequent events signal an openness to critical ideas within the
ANC.
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32 Stephen Gelb
Macroeconomic Policy and Development

From Crisis to Crisis
STEPHEN GELB
IN ORDER TO UNDERSTAND development in South Africa, it is essential

to understand the country’s economy, economic policy and economic
performance. The economy had performed very poorly from the mid-1970s
up to 1994. Gross domestic product (GDP) growth averaged only 3.3% per
annum in the 1970s and 1.2% in the 1980s, and a fierce policy-induced
recession intended to cut inflation meant that growth between 1990 and
1993 was !0.6% per annum. When the post-apartheid era began in 1994,
the expectation was that economic growth would quickly improve, but fifteen
years later, the optimism at the time of transition has been unfulfilled: only
limited progress has been made in raising growth while distributional equality
has remained stagnant at best. In the first decade of democracy, GDP growth
averaged only 2.9% per annum but, taking account of population growth of
2% per annum, per capita income barely increased at 0.9% per annum.
Between 2004 and 2007, growth averaged 5.06% per annum, before dropping
back to 3.06% in 2008 in the context of the global financial crisis. In June
2009, the official unemployment rate was 23.6%.1
In 1995, 32% of the population was living on less than $2 per day. This
proportion rose to 34% by 2000 (Hoogeveen and Özler 2005), before declining
to 24% by 2005. Using a poverty line of R322 per capita per month in 2000
prices, determined by the cost of a ‘basic needs’ basket of goods and services,
52.5% of the population was in poverty in 1995 and 53% in 2000. This
number decreased to 47% in 2005, still an inordinately high proportion.
These data indicate that between 2000 and 2005 there was an improvement
in alleviating poverty, and the larger decline in the $2 per day numbers
compared with the R322 per month numbers suggests that those deepest in
32
Macroeconomic Policy and Development 33
poverty had improved their situation somewhat more than those at slightly
higher incomes.2
Notwithstanding the improvement, poverty remains extreme; in fact,
inequality measures have deteriorated. The most common measure of
inequality, the Gini co-efficient, is calculated by Haroon Bhorat, Carlene
van der Westhuizen and Toughedah Jacobs (2009) to have increased (i.e.
worsening inequality) from 0.63 in 2000 to 0.69 in 2005.3 The official
calculation of the Gini for 2005 was 0.73 (Statistics South Africa 2008),
making South Africa certainly amongst the two or three most unequal
countries recorded globally. More illuminating perhaps is that the richest
10% of the population received 51% of total household income, while the
poorest 10% received a mere 0.2% of the total; the ratio of average income
between the two groups thus amounted to a massive 255:1. The richest 20%
of the population received 68.8% of the total income, compared with the
poorest 20% obtaining only 1.4%, a ratio of 49:1. The poorest 40% of the
population received only 6.5% of total household income. An estimated
660 000 households reported no income at all from either work or social
grants (Statistics South Africa 2008).
To be sure, there has been stability in some key economic variables:
consumer price inflation was below 8% almost continuously between 1996
and 2007, compared with 15.3% in 1991 and 9% in 1994, before reaching a
peak of 13.6% in mid-2008 in the face of rising oil and food prices on global
markets. The fiscal deficit was reduced from 7.3% of GDP in 1993 to below
3% from 1999 and to a surplus in 2006–07 and 2007–08. Yet it is fair to ask,
first, whether this represents macroeconomic success, since the international
financial situation has been extremely volatile, with three currency crises
between 1996 and 2001, and marked fluctuations in capital flows. Second,
even if overall performance is regarded as successful, it could be asked whether
the price has not been too high, given the poor performance of output and
employment growth.
This chapter examines macroeconomic policy and performance in South
Africa since 1994. First is a discussion of the transition period because this
shaped the policy choices of the democratic government. Next, I describe
macroeconomic policy since 1994, which has been articulated through a
series of frameworks – the Reconstruction and Development Programme
(RDP); Growth, Employment and Redistribution (GEAR); and the
Accelerated and Shared Growth Initiative for South Africa (ASGISA). This
34 Stephen Gelb
section of the chapter looks first at fiscal policies and then turns to monetary
and exchange rate policies. I then examine macroeconomic performance,
looking at investment, savings and the balance of payments. The fourth
section assesses ASGISA, which was adopted in 2005 in the context of the
global commodity boom, as well as the policy response to the 2008 global
financial crisis and recession.
The political economy of crisis and transition

The origins of post-apartheid policies are found in the economic crisis which
started during the 1970s and was characterised by a structural slowdown in
economic growth reinforced by political problems (Gelb 1991). The slowdown
was triggered by the global recession following the collapse of the Bretton
Woods monetary system and the 1973 ‘oil shock’. In South Africa,
spontaneous wage strikes from 1973 and student uprisings from 1976 added
to slower growth by causing capital flight, while also forcing the government
to relax some of the restrictions on the urban black population. The growth
slowdown continued during the 1980s, despite a brief respite when the gold
price rose more than $800 in 1980–81. Fixed investment dropped from
more than 25% of GDP in the 1970s to about 18% in the mid-1980s.
Productivity growth in manufacturing declined from 2.3% per annum in
the 1960s to 0.5% in the 1970s and !2.9% during the first half of the
1980s. Despite slower growth overall, some sectors prospered. Macroeconomic
policy favoured mining exports, but raised manufacturing import costs and
lowered profitability. Financial institutions enjoyed a short-term profit boom
as mergers and acquisitions rose and foreign corporations disinvested.
Ownership concentration and the economic power of white big business
increased: by 1990, six conglomerates centred on mining and finance
controlled companies with 80% of the market capitalisation on the
Johannesburg Stock Exchange.
An international anti-apartheid campaign calling for trade sanctions and
disinvestment gained momentum as political upheaval increased during the
early 1980s. In 1985 international creditors recalled South African public
sector debt after the government declared a state of emergency. The capital
outflows required for debt repayment further tightened the balance of
payments constraint on growth, since investment depended on imports of
capital equipment and intermediate goods. These economic pressures helped
to shift South African business by 1989 to support democratisation as the
corporate sector reluctantly recognised that higher growth depended on access

to international capital flows, which in turn depended on an acceptable
political settlement to end apartheid.
The crisis reshaped the black class structure and civil society as well.
Extreme inequality between races, which was characteristic of the high
apartheid period from 1948 to the end of the 1960s, was moderated during
the 1970s, as more black people with education and skills found work:
employment in the services sectors grew and technical and white-collar
occupations increased their share of the labour force in all sectors. The
number of black people in middle-class occupations grew at a rate of more
than 6% per annum, nearly trebling between 1970 and 1987, when 19% of
employed black people were in middle-class jobs and black people comprised
nearly 25% of the middle class, with Coloureds and Indians making up
another 18%. However, there was increased class differentiation and inequality
within race groups after 1975 (Crankshaw 1997; Seekings and Nattrass 2005).
Layoffs rose and job creation amongst low-skilled black people was non-
existent. Unemployment amongst black people was unofficially estimated at
11.8% in 1970 and 20.8% in 1980, with job losses primarily amongst
unskilled black workers in manufacturing and construction.
The growing urban black professional middle class organised politically
and socially through professional and business bodies as well as media and
cultural associations, while a powerful trade union movement emerged,
organising semi-skilled and unskilled black workers both in the workplace
and outside it, working with community organisations and women’s and
students’ groups. The exiled nationalist movement, the African National
Congress (ANC), provided strategic focus to support internal political opposi-
tion, while also mounting a low-key armed struggle and leading international
boycott pressures. As the 1980s proceeded, both black organisations and
white power-holders outside the state increasingly recognised their common
interest in establishing non-racial democracy. In 1989, black trade unions
and white big business campaigned together for the first time against state
repression in industrial relations, a major step not only towards non-racial
democracy but also to a negotiated transition rather than a handover of power
by a defeated apartheid state to a victorious liberation movement.
The form of the transition reflected the prevailing balance of class power
at the time and defined the possibilities and limits of the negotiated outcome.
The start of formal political negotiations gave impetus to an already lively
36 Stephen Gelb
debate about post-apartheid economic policy, which took place in a

proliferation of conferences, workshops and meetings. Negotiations propelled
the emerging black middle class to the forefront of the black opposition by
providing this group with substantial new political resources, including much
enhanced space to engage in the economic policy process.
The economic debate was not a tabula rasa from which any outcome
could emerge, the dominant policy to be decided simply by political
contestation amongst the contending parties. In fact there were certain
‘structural imperatives’ reflecting the economic context in which the transition
took place and which all sides had to address. First, the foremost priority for
all sides was an immediate revival of growth, which would require a significant
increase in domestic fixed investment and therefore also in foreign capital
inflows to supplement meagre domestic savings. The conventional wisdom
of the early 1990s was, for better or worse, strongly in favour of liberalisation
of the financial and goods markets to allow free (or at least freer) flows
between the domestic economy and the rapidly globalising international
economy and argued that capital inflows required liberalisation. The left-
wing tradition in which the ANC was rooted opposed liberalisation in favour
of relatively closed markets and emphasised the macroeconomic
destabilisation that would likely result from ‘opening up’. This was the correct
emphasis, as shown below, but it was not politically credible in South Africa
at the time. The anti-apartheid forces had argued from the 1960s and
successfully during the 1980s that South Africa’s exclusion from international
trade and capital flows was essential, so as to reduce economic growth and
thereby force white people to the bargaining table. The effectiveness of this
strategy made it very difficult for the ANC to argue just a year or two later
that growth could now be reinvigorated without foreign capital inflows. This
political fact overdetermined the outcome of the crucial economic debate
on liberalisation and South Africa’s engagement with globalisation.
Similarly, even if a major economic role for the state was desirable (and
it certainly was desirable for most in the ANC), this would be possible only
as a longer-term goal: raising domestic investment in the short term required
establishing business confidence amongst domestic and foreign private
investors. Very soon after their unbanning, black opposition leaders
acknowledged the growth and investment imperatives facing South Africa
and moved to reassure domestic and foreign investors, while insisting on the
need to address apartheid’s distributive legacy for reasons of social and
political legitimation. As Nelson Mandela expressed it during the ANC’s

very first public meeting with organised big business after its unbanning
(and three months after endorsing nationalisation in his first speech on his
release from prison): ‘We [the ANC] have no desire to go out of our way to
bash them and to undermine or weaken their confidence in the safety of
their property and the assurance of a fair return on their investments’
(Mandela 1990). He went on immediately also to articulate a redistributive
priority for the ANC: ‘But we believe that they too must be sensitive to the
fact that any democratic government will have to respond to the justified
popular concern about the grossly unequal distribution of economic power’,
in which the focus was deracialising the ownership and management of the
existing large corporate sector, notwithstanding that this affected ‘the sanctity
of private property’.
The ANC was also strongly mindful of the threat posed by
‘macroeconomic populism’ – excessive fiscal spending leading to hyper-
inflation – to the sustainability of its own long-term project, as illustrated by
the fate of the Unidad Popular government of Chile in 1973 and of the
Sandinista government of Nicaragua in the early 1980s, two progressive
governments with popular support which had fallen, at least in part, as a
consequence of the problems resulting from unsustainable public expenditure
programmes.
The process and modalities of the economic policy debate were crucial
to the way in which specific reforms were introduced. The phase from the
unbanning of the ANC to the first democratic election was long – four years
– and, unlike the Constitutional negotiations, the economic policy debate
was decentralised, unco-ordinated and unofficial. There was no centralised
or coherent political or technical co-ordination (on either side) and therefore
considerable space and autonomy for policy initiatives to proliferate, often
promoted by small interest groups. One example is the deregulation of the
Johannesburg Stock Exchange, which was initiated by the Exchange itself in
1992 and legislated in 1994 with, it would seem, no discussion with the
ANC. Although the ANC increasingly behaved like a ‘government in waiting’
and insisted on veto power over new government policies and processes, it
did not have sufficient personnel or experience to control the many initiatives
that were under way. At the same time, the existing state became increasingly
incoherent and disorganised and similarly without capacity (and unwilling)
to co-ordinate policy. Many state bureaucrats actively participated in the broad
38 Stephen Gelb
economic policy debate, but also in initiatives aimed at shaping and limiting
options available to the future government.
Inherited stock of physical capital was neither devalued nor was its
ownership affected in the course of the transition. In this sense, South Africa
differed from other transitions where capital assets and their owners were
either physically destroyed by war, or politically defeated by revolution, or
forced to depart the economy through decolonisation. South Africa’s existing
capital stock was substantial and diverse. The well-developed manufacturing
sector was dominated by capital-intensive resource-based materials processing
sectors (basic metals, chemicals, pulp and paper), which as a result would be
the main beneficiaries of a shift towards export-led growth. Almost the entire
private capital stock was owned by white business, a group that thus retained
substantial power. The size and structure of the capital stock limited the
scope and pace of shifting output and technology to more labour-intensive
paths and of shifting capital asset ownership away from a white monopoly.
A ‘basic needs’ policy with wide support amongst the ANC and its trade
union allies was initially formulated in 1990 and later elaborated as the
RDP, the ANC’s 1994 election manifesto (ANC/COSATU 1990; ANC
1994). Despite its great attractiveness in principle, based on its direct focus
on reducing inequality, this approach was not feasible in the economic and
political circumstances of the new democracy. The policy centred on small
and medium producers, especially new black entrepreneurs, selling labour-
intensive consumer goods into low-income domestic markets. The set of
technology, labour and output choices in production which this implied
could not be adopted overnight, while even far-reaching positive
discrimination in the post-apartheid capital market would only impact on
the racial distribution of assets over an extended period. Furthermore, the
basic needs policy was unlikely to avoid significant macroeconomic instability
in the course of implementation because it did not directly address the import
dependence and export failure of apartheid-era manufacturing.
An accommodation – or implicit bargain – soon emerged in the unofficial
economic negotiations, reflecting a consensus over three policy objectives:
maintaining macroeconomic stability (particularly in regard to low inflation
and fiscal deficits), reintegration of South African trade and finance into
international markets, and capital reform to deracialise ownership and
management in private and public sectors. Large differences remained over
specific policies to achieve these goals and detailed discussion was significantly
influenced by the prevailing international conventional wisdom. In the early

1990s, for example, trade and capital account liberalisation and low fiscal
deficits were a sine qua non for international capital inflows. However, the
main elements of this bargain have shaped economic policy since 1990.
Economic policy shifts since 1994

During the constitutional negotiations, the ANC’s strategy emphasised
stability, including reassuring white people to prevent a flight of capital and
skills. The approach to economic issues reflected the same considerations,
with the central bank governor and minister of finance from the pre-1994
government at first retaining their positions. Detailed policy formulation to
implement the implicit bargain started well before the 1994 elections, with
ANC officials increasingly included as constitutional agreement was reached.
As noted though, there was little policy co-ordination across issues relating
to international trade in goods, financial markets and labour markets. Many
reforms formulated before 1994 by officials from the previous government
and/or narrow interest groups were legislated before the ANC got into
government or immediately after. In the macroeconomic arena alone, by the
end of 1994, and notwithstanding that the RDP was official policy, fiscal
deficit targeting had been explicitly adopted, central bank independence
was enshrined in the Constitution, commitments on trade liberalisation
had been formally agreed in the General Agreement on Tariffs and Trade
(GATT), legislation had been passed opening the banking sector and the
Johannesburg Stock Exchange to foreign participation and capital controls
on non-residents had been scrapped. Capital reform had started in 1993,
with the first transfer of equity by Sanlam to selected black beneficiaries and
other firms soon following. The economic policy shift was effectively ‘locked
in’, since even if the ANC had been able to assess all these policy reforms
and decide what needed to be reversed, their reversal would have resulted in
a massive loss of investor confidence, capital flight and a substantial rise in
the cost of capital.
During 1995, disappointment grew about the limited improvement in
growth and employment achieved by the RDP and the government decided
that a macroeconomic stimulus was necessary. This would have been possible
via either currency devaluation or fiscal expansion. While policy discussion
was still under way in February 1996, the first post-apartheid foreign exchange
crisis hit. Net capital inflows dropped from R11.2 billion in the second half
40 Stephen Gelb
of 1995 to R2.7 billion in the first half of 1996, while the nominal exchange
rate depreciated by 18%, making devaluation redundant. The sense of crisis
shifted priorities, so that when the new macroeconomic policy framework
was announced in June 1996 – named the Growth, Employment and
Redistribution (GEAR) strategy – its immediate goal was to stabilise the
foreign exchange market and restore capital inflows. According to the GEAR
policy, growth was to be achieved by raising both foreign direct investment
and domestic fixed investment through more ‘credible’ macroeconomic policy,
understood to imply an emphasis on tighter fiscal and monetary policy.4
Additional objectives included increased exports through a stable real
exchange rate and enhanced competitiveness from labour market reforms,
skills training and accelerated tariff reform.
However, as many emerging markets have discovered since the early 1990s,
adopting and sticking to the ‘right’ policies – often restricting economic
activity even when domestic conditions support relaxation – has not avoided
external volatility and destabilisation (Krugman 1995). South Africa’s
macroeconomic circumstances were dominated for many years by foreign
exchange crises in 1996, 1998 and 2001, each involving a capital flow reversal
and exchange rate collapse. Growth, fixed investment, savings and the balance
of payments have been adversely affected by inconsistent signals from the
interest rate and exchange rate, offsetting the intended boost from lower
fiscal deficits and inflation rate.
Fiscal policy
This is the economic policy success story since 1994. The new government
inherited a difficult fiscal position due to vast spending in the dying days of
apartheid, when the old government tried to buy support from black people
and ensure white supporters’ future well-being. The deficit rose from 1.4%
of GDP in 1991 to 7.3% in 1993 and government debt from 29% of GDP in
1990–91 to 47% in 1994–95. Since 1994, the government has completely
reorganised the budgetary and expenditure processes and introduced
improved systems of financial planning, expenditure management, reporting
and accountability, which have resulted in much greater capacity to direct
and control spending.
Together with the adoption of strict fiscal deficit targets from 1994,
these reforms contributed to the deficit’s steady decline to below 3% of
GDP in 1999. The fiscal deficit was one of the few GEAR targets actually
achieved, perhaps because a powerful ministry – the National Treasury –

had direct control over the policy instrument. However, other indicators,
such as the primary surplus (revenue less non-interest expenditure), suggest
fiscal policy has been erratic. Real non-interest expenditure grew 7.8% per
annum between 2001 and 2004, after real cuts of almost 2% per annum the
previous three years. However, the primary surplus actually declined from
3.14% in 2001–02 to 1.32% in 2003–04, suggesting that, although somewhat
relaxed, fiscal policy remained contractionary during the 2001 currency crisis
and its aftermath. This underlines that there are limits to the degree to
which fiscal policy expansion can be used to stabilise economic activity when
capital inflows suddenly reverse and the exchange rate declines. However,
from its low point in 2003–04, the primary surplus then expanded to 3.49%
in 2005–06 and 3.44% in 2006–07; that is, the policy stance was con-
tractionary (appropriately counter-cyclical) during the period when GDP
growth was strongest. With the onset of the current global crisis, the primary
surplus has plummeted to an expected deficit of !4.9% for 2009–10 (National
Treasury 2010). It is easier for policy to respond to a demand-induced
contraction.
Lower interest rates and fiscal deficits from 1999 to 2000 cut public
debt from close to 50% of GDP to 22.4% in 2008–09, lowering interest
payments and fiscal space for increased social spending. This had risen by
23.8% in real per capita terms between 1993 and 1997, with significant
redistribution across income and racial categories: per capita spending on
the lowest income quintile increased by 28% and on the next two quintiles
by 56% and 31% respectively. The expansion of the social grant system
would have increased spending on the lowest quintile significantly after that
point. Between 1995 and 2000, average per capita social spending rose 14.1%,
but for black South Africans the increase was 20.6%, while for white people
there was a decrease of 6.6% (Van der Berg 2001, 2009). The functional
distribution of spending remained relatively stable between 1995 and 2009
with social service spending close to three-fifths of government current non-
interest spending. Education accounts for 40–45% of social service spending,
with health and welfare each receiving about one-fifth and the remainder
going to housing, land reform and water and sanitation programmes.
To address inequality, the outcome of government spending is critical.
We can distinguish programmes that distribute money to poor people to
supplement current incomes or provide public goods and services which
42 Stephen Gelb
supplement current consumption, where government has been reasonably

effective, from programmes which require asset transfers to the poor for
housing or land reform, or ongoing service delivery to enable poor people to
build assets, such as in education, where success has been limited. In the first
category, social assistance programmes have wide coverage. In 2008–09, the
government spent 10.7% of its non-interest expenditure on social security
grants, an amount of R70.73 billion, equivalent to 3.3% of GDP.5 Grants
were provided to 12.4 million direct recipients, about one-quarter of the
population. The number of recipients grew by 11.8% per annum between
2004 and 2008, and even in the richest province, Gauteng, grants were pro-
vided to about one-sixth of the population (National Treasury 2008). The
total income from social grants as reported by households in 2005–06 was
R56.8 billion, equivalent to 6.1% of gross household income. However,
amongst households in the lowest income decile, grant income was about
75% of household income and in the second-lowest decile, about 70%
(Statistics South Africa 2008).
By 2002, a free water grant to poor households was available to 57% of
the population, which rose to 66% in 2004 and 82% in 2008. Another 5.25
million people gained access to the water allowance between 2004 and 2008,
and yet another 4.6 million are scheduled to receive it by 2011. Outside the
Organization for Economic Cooperation and Development (OECD)
countries, South Africa has perhaps the highest proportion of its population
covered by social assistance, a significant achievement. Clearly, grants and
free transfers of goods and services such as the basic water allowance are a
crucial supplement to poor people’s current incomes and so play a crucial
role in alleviating poverty by supporting poor households’ consumption.
By contrast, in programmes to create jobs and to enable poor people to
build assets – two approaches to sustainable poverty reduction – outcomes
have been less successful, even where expenditure shifts have been significant.
In education, overall state spending increased by about 2.25% annually in
real terms between 1995 and 2006 and spending per pupil was equalised
across races soon after 1994. However, a strong correlation remains between
pass rates and pupils’ races. One reason has been that schools have been
allowed to raise revenue via fees for additional teachers and facilities, so that
formerly white schools in more affluent areas have in general been able to
provide better-quality education than schools in townships or informal
settlements.6 The apartheid backlog in education has not been effectively
addressed: in 2002, eight years into the new government, 40% of schools
were inadequately supplied with classrooms and/or electricity, while 49%
were without textbooks. In other words, the improvement in equality of
educational inputs has been of limited scope and equality in outcomes has
not improved. In a 2003 test of reading skills for Grade 6 learners in the
Western Cape, 35% overall were performing at the required level. However,
the scores differed starkly, depending on which schools learners attended –
more than 80% of learners at formerly white schools (who were not necessarily
white) met Grade 6 standards, but only one-third of learners at formerly
Coloured schools and only 4% at formerly black schools did so (Taylor,
Fleisch and Shindler 2008). It remains extremely difficult for poor black
people to acquire education to use as an asset to leverage their engagement
in the economy – jobs, business opportunities and so on – to produce future
income.
Other crucial assets for poor people are housing and land, both key
RDP programmes. Between 1994 and 2003, 1.48 million houses were built,
an average of 470 per day, and between 2004 and 2008, another 1.1 million
were built. Without diminishing the magnitude of this achievement, there
remained an acknowledged shortage of 2.1 million houses. Housing experts
have criticised the government for a narrow focus on quantitative targets,
undervaluing housing quality, physical durability and also the diversity of
housing demand and broader community development. Land reform budgets
have fallen well short of needs. Despite a 30% target by 2014, only 1% of
farm land had been transferred by 2002, and 4.7% by 2008.7
Between 1994 and 1998, overall public investment rose in real terms by
9% per annum and from 3.7% to 6% of GDP, but then declined, given the
broadly contractionary fiscal stance. After the 2001 budget, public investment
grew by close to 10% annually. Nonetheless, public capital spending remained
below 5% of GDP between 1992 and 2005, compared with 10% of GDP
during the crisis-ridden 1980s.8 Within its overall stance of capping public
investment, the government emphasised social rather than economic
infrastructure and the former grew faster than the latter between 1994 and
2001. Since 2005, in the context of ASGISA and the 2010 Soccer World
Cup, this has been reversed and the parastatals responsible for infrastructure
services have undertaken huge capital maintenance, refurbishment and
expansion programmes. In 2008, public investment reached 7.5% of GDP.
44 Stephen Gelb
Success in fiscal policy has been significantly assisted by the huge

improvement in tax revenue collection. The South African Revenue Service
was modernised, resulting in greater efficiency, a wider tax base as more
people were drawn in and greater taxpayer compliance. From 1998–99 to
2002–03, the number of individual and company taxpayers each grew about
12% per annum. Tax revenue rose from a low of 22.6% of GDP in 1995–96
and has remained just below the GEAR-specified ceiling of 25% since 2001–
02. Improved revenue enabled reduction of tax rates, but 86% of the R72.8
billion of forgone taxes between 1994–95 and 2004–05 were allocated to
personal income tax cuts for the middle classes, supporting higher
consumption spending, rather than alternatives such as public investment,
public spending on the poor or lower business taxes to support job creation.
The income tax burden – the share of aggregate personal income paid in tax
– fell from almost 15% to below 12% in 2002, before rising from 11.9% in
2006 to 12.9% in 2008.
Monetary and exchange rate policy

In any economy most monetary authorities would choose, if they could, to
have three conditions simultaneously: an open capital market to enable access
to external finance, a stable nominal exchange rate to support international
trade and the ability to adjust interest rates to meet domestic objectives (such
as output growth and price stability). However, these three conditions
constitute a ‘trilemma’: only two can be adopted simultaneously, at least in
the medium term, so policy authorities must decide which one to abandon.
Until 1994, South Africa’s capital account was closed, with exchange
controls and a dual exchange rate (commercial and financial rand rates) to
discourage capital outflows and disinvestment. Domestic business strongly
favoured liberalisation of exchange controls to facilitate capital outflows,
and by 1994, the Reserve Bank had also committed to this path. As noted
above, the ANC had little option but to go along with this, given its long
history of advocating economic sanctions against the apartheid regime. The
two-tier currency was abolished in March 1995, removing restrictions on
foreign owners of capital, and three-quarters of the foreign exchange control
regulations on domestic investors were eliminated by 1998. In 1995, branches
of foreign banks were allowed to operate and the Johannesburg Stock
Exchange admitted foreign brokers. By 2000, there were twelve foreign bank
branches and 61 representative offices in South Africa. Inflows of direct

foreign investment have also been encouraged by the establishment of
promotion agencies to woo foreign multinationals and more liberal regulatory
regimes in most infrastructural services.
After opening the capital markets, the Reserve Bank initially tried to
avoid the trilemma and to pursue all three objectives. The Bank was anxious
about excessive inflows, which can cause price inflation and exchange rate
appreciation thereby damaging international competitiveness. Between July
1994 and June 1995, there was a net inflow of R18.6 billion (about 3.8% of
GDP), compared with the accumulated net outflow of R50 billion between
the debt standstill in 1985 and 1993. Capital account liberalisation in March
1995 was also intended to reduce net short-term inflows by offsetting large
gross inflows with capital outflows. Capital inflows were used to increase
foreign exchange reserves, enabling the Reserve Bank to reduce its large
‘contingent liabilities’ of $25.8 billion in the forward foreign currency market,
which were a source of financial weakness.
Up till August 1998, the Reserve Bank raised real interest rates to hold
back inflation and ‘sterilised’ net capital inflows, keeping them offshore to
limit money supply growth and also to restrict inflation. The nominal
exchange rate was slowly depreciated to enhance competitiveness while
avoiding inflation. Trying to avoid the trilemma was an optimistic strategy
and possible only if net capital inflows were large and had long-term
maturities. This was the case between March 1995 and January 1996 and
again between September 1996 and April 1998. But an open capital market
meant that net inflows were susceptible to abrupt reversal, which occurred
in both February 1996 and May 1998, the first triggered by domestic political
uncertainty and the second in the wake of the Asian crisis. Expecting a rand
depreciation, foreign portfolio investors’ herd-like behaviour – rushing to
sell rand-denominated assets to avoid losses in their own currency – produced
a self-fulfilling prophecy. In both episodes, the Reserve Bank tried to stem
the outflow by selling dollars into the market and increasing its future
commitments to buy dollars, a costly and ultimately wasteful exercise. In
September 1998, these commitments were roughly the same as in March
1995, but about $25 billion in foreign currency had been spent in the interim
and foreign exchange reserves had dropped to dangerously low levels. At the
same time, real interest rates were hiked – about 2.5% in 1996 and a full 7%
in 1998 – in a vain effort to attract foreign portfolio capital back to the
46 Stephen Gelb
economy. In both crises, the rand eventually restabilised at levels about 20%
below the pre-crisis level and net capital inflows rose.
Late in the 1996 crisis, the GEAR policy statement was issued to address
(portfolio) investor credibility. GEAR explicitly committed government to
all three trilemma objectives. But in September 1998, the Bank decided that
the costs of trying to achieve all three objectives were too high and policy
entered a new phase. Capital account liberalisation was not put in question,
but the priority on low inflation meant that exchange rate stability was
abandoned in favour of monetary policy autonomy. This was formalised
with the introduction of inflation targeting from February 2000. The target
is set by the minister of finance while the Reserve Bank uses interest rate
adjustments to meet it. The initial target was 3–6% by April 2002. Although
inflation inertia had broken by 1993 and the consumer price index dropped
steadily from 10% until 2000 (helped by tariff liberalisation and increased
product market competition after 1994), the rand’s nominal depreciation of
25% in late 2001 pushed up prices and the inflation target was missed.
Nominal interest rates had dropped after 1998 but the Reserve Bank raised
them during 2002 to restore price stability; by late 2003, it had met the
target and interest rates began dropping again. As in 2002–03, interest rate
increases are often appropriate within an inflation targeting regime but their
timing is often at odds with the stage of the business cycle. This underlines
the rigidity of inflation targeting which focuses on a single objective, the
price level, ignoring the need for output stability in the real economy.
Between mid-2001 and 2005, the rand was possibly the most volatile
currency in international markets, which further reinforced the negative
impact of higher interest rates. In 2001, a third rand crisis occurred, the
causes of which remain unclear despite an official inquiry. In real trade-
weighted terms, a slow 25% depreciation between late 1998 and August
2001 was followed by a sudden depreciation of another 25% in three months
and then by a 45% appreciation over eighteen months to mid-2003. Capital
flows were equally unstable, with five abrupt and large reversals in two years
from mid-2001, a period of increased turbulence on international financial
markets, with the dotcom bubble bursting, 9/11, rising commodity prices,
the Iraq war and the dollar weakening. On the other hand, floating the
exchange rate enabled the Reserve Bank to eliminate its forward exchange
rate contingent liabilities (with additional help from foreign borrowing by
government) and rebuild official foreign exchange reserves, which reached
$35 billion by July 2008. This strengthened South Africa’s financial health
and led to an upgraded rating from international credit agencies.
However, the positive financial impact must be counterbalanced by the
conclusion that policy has, intentionally or not, privileged financial concerns
over production and portfolio investment over fixed investment. Throughout
the decade, exchange rate volatility has meant inconsistent signals from the
exchange rate to producers of tradables, increasing uncertainty and
encouraging ‘waiting’ in production and investment decisions. At the same
time, interest rate policy has been concerned narrowly with lowering inflation,
so that it is hard not to conclude that domestic price and fiscal stability have
been achieved only at the expense of external instability, giving the lie to the
repeated claims by the monetary and fiscal authorities that macroeconomic
stability has been achieved. Indeed, the governor of the Reserve Bank argued
that volatility was a ‘fact of life’ beyond the Bank’s control:
Volatility is, of course, part of our economic system. Cycles of boom

and bust, ‘irrational exuberance’ and gloom, occur from time to
time . . . Uncomfortable as this might be for central banks focusing
on inflation and stability, it is inevitable and we have to live with it
– sit tight, grit our teeth and suffer in silence (Mboweni 2001).
Macroeconomic performance
Fixed investment is critical for economic growth, in the short term through
its positive effect on aggregate demand, and in the medium to longer term
through raising the economy’s supply capacity and thus its potential growth
rate. In South Africa, fixed investment growth fluctuated markedly after
1993. Until 1996, it rose strongly in response to GDP growth and the
confidence-boosting impact of democracy, but between 1997 and 2002, the
period during which the GEAR policy operated, currency volatility dominated
fiscal discipline and low inflation, resulting in a sluggish investment growth
rate of only 2.4% annually. From 2003, spurred by the global commodity
boom which raised the demand for South Africa’s natural resource-based
exports and the associated currency appreciation which lowered the cost of
imported machinery, investment recovered strongly, averaging 11.3% annual
increases through 2008. In the longer-term perspective, even though profit-
ability and productivity in the private sector improved significantly during
the second half of the 1990s, private investment averaged only 12.1% of
48 Stephen Gelb
GDP between 1994 and 2003, compared with more than 13% in 1982, 14%
in 1988 (after the foreign debt standstill) and an average of 10.6% between
1990 and 1993, when the economy was in deep recession and the political
situation in deep uncertainty. It was only after the global commodity boom
was strongly under way that the private sector responded, with an investment
rate of 14.8% between 2004 and 2008. As noted above, the gap in investment
demand was not filled by public sector investment, which until 2005 remained
below 5% of GDP. Total fixed investment rose above 20% of GDP only
from 2006.
Poor private sector investment until 2003 was partly due to sluggish
aggregate demand in the face of contractionary fiscal policies, exchange rate
volatility and interest rate fluctuations. Low business confidence and the
reluctance to make long-term financial commitments was also related to
uncertainty about the socio-political environment, which may in turn have
reflected anxiety that the future operating environment would be affected
by South Africa’s high level of inequality (Keefer and Knack 2000; Gelb
2001). Certainly the concern expressed by the corporate sector during 2006–
07 about ‘regime change’ within the ANC and a trade union-influenced
leadership could be interpreted as worry about policy moving in a strongly
populist direction from 2009.
National savings since 1994 have ranged from 14.5% to 16.9% of GDP,
well below 1980s levels. Policy since 1994 has been premised on the neo-
classical economic view that savings are a constraint on investment and growth:
the tight fiscal stance from 1993 was justified by the government arguing
that there was a need to raise public savings. These were negative during the
early 1990s spending spree, but averaged 2.6% of GDP between 1999 and
2002 and 3.6% between 2005 and 2008. However, it is debatable that
investment was in fact held down by low domestic savings, since the latter
exceeded investment in all but two years between 1994 and 2005 and
corporate savings were sufficient to finance corporate investment.
At the same time, the propensity of corporations and households to
save from income may have dropped, so that income growth yields a smaller
volume of savings than in the past. Corporate savings have declined as a
share of GDP since 1996, notwithstanding a rise in net profit from 24.7%
of GDP in the 1980s to 31.1% since 1994, suggesting higher dividend payouts
in preference to retained earnings to fund investment. The corporate financial
balance (the difference between the sector’s savings and its own investment)
dropped from a surplus of 2.24% of GDP between 1994 and 1998 (when
corporate investment was low) to 1.01% between 1999 and 2003, when
investment began to pick up but savings did not, to a deficit of 3.3% of GDP
between 2004 and 2008, as investment strengthened further but corporate
savings declined to only 11.5% of GDP. During the 1980s, households’
average savings were 2.8% of GDP, but by 1998 this had dropped to below
1%, and over the full period of 1995–2008 household savings averaged less
than 0.5% of GDP. This period reflected a substantial increase of con-
sumption out of income compared with the 1980s and, after 2006,
households dis-saved. Consumption growth of 4.4% per annum after 1994
was faster than the growth of both GDP and of household disposable income
per capita, which grew at only 0.83% per annum. After 1993, household
wealth rose with declining inflation and rising asset values (especially of
housing), and this ‘wealth effect’ supported a consumption spurt in the
mid-1990s which continued as interest rates declined from 1998 and lowered
household debt levels. From 2004, consumption growth of 7.1% per annum
was again supported by wealth effects, linked to the global housing and
equity price bubbles during this period, but also driven by the growth of the
black (upper) middle class and its catch-up in living standards.
In the balance of payments, reopened access to international borrowing
from 1993 enabled South Africa to return to the normal position of
developing economies of a current account deficit and net capital inflows.
The current account deficit is equivalent to the domestic financial balance,
the difference between domestic investment and domestic (national) savings.
As noted, the financial surplus of the corporate sector largely offset the
financial deficit of the public sector until 2002, so that, even though
household savings were low, the aggregate domestic financial deficit remained
small. In other words, the current account deficit between 1994 and 2004
was well below 2% of GDP and easily manageable, even being in surplus
during 2001–02. In 2003 though, the public sector’s investment began to
rise while corporate investment also rose and its saving dropped from 2004.
As a result, the deficit on the domestic financial balance and the current
account of the balance of payments grew from 3.2% of GDP in 2003 to
6.3% in 2006 (its highest level since 1982). At this point it was already a
looming constraint on overall growth, irrespective of the international
economic situation, though it continued to rise to 7.4% in 2008 when the
global financial crisis hit.
50 Stephen Gelb
The current account balance can be seen as the sum of the trade balance
(including goods and non-factor services) and the factor services balance.
Looking at the balance of trade first, both imports and non-gold exports
had risen by more than 60% and 80% respectively to more than 29% of
GDP between 1993 and 2002, but the strong rand and the growth in invest-
ment pushed imports upwards from 27.1% of GDP in 2004 to 38.5% in
2008.9 Volume indices show that imports grew very rapidly until 1997 as
trade liberalisation occurred and then levelled off, before surging after 2002,
rising by 80% through 2008. Higher exports – partly driven by currency
depreciation – include a much larger share for manufactured goods, though
these are largely materials processed from natural resources. Gold exports
declined during the 1990s: the gold production index dropped 28% from
1986 to 1999 and gold exports dropped from 6% to 4% of GDP between
1993 and 2002. In 2003, the gold price (in dollar terms) was at the same
level it had been in 1993 and it rose to reach almost 2.5 times this level up
to 2008. Nonetheless, gold exports contributed only 2% to GDP in 2008,
half the 2002 level. The overall trade balance was consistently in surplus
until 2003, averaging just over 1% of GDP between 1995 and 1998 and
rising to around 4% of GDP in 2001 and 2002. Since 2004 there has been
a trade deficit each year and since 2006 this has been above 3% of GDP.
A deficit in factor services (which includes interest and dividend payments
to foreign corporations) has been a problem for the South African economy
for decades and the main concern in relation to a balance of payments
constraint. Between 1994 and 2003, the factor services deficit was in fact
smaller in absolute terms than during the 1980s – 20% lower in US dollar
terms – even though it rose as a share of GDP from 2.2% in 1995 to 3.1%
in 2000 and 4.3% in 2008. This was largely due to dividend payments to
foreign investors, which have risen from around one-fifth of the overall factor
services deficit in 1993–94 to well over four-fifths during 2005–08. It is not
clear how much of this increase is due to the relocation offshore of major
South African corporations such as Anglo American, SABMiller and Old
Mutual and how much is due to payments by ‘genuine’ foreign investors.
Other important components of the factor services deficit have been the
increase in foreign portfolio investment in the Johannesburg Stock Exchange –
and the consequent rise of dividend outflows – and the more recent net
outflow of foreign aid from South Africa (more than 1% of GDP since
2005).
In the capital account, net capital inflows exceeded the current account
deficit in the periods 1994 to 1999 and 2004 to 2007 and in these years
would have contributed to financing higher domestic fixed investment, had
the latter been stronger.10 In three of the four years between 2000 and 2003,
there were net outflows from South Africa. Instead, capital inflows have
been used to build foreign exchange reserve stocks. Because South Africa
has highly developed financial markets, the largest component of inflows
has been portfolio inflows, which are generally volatile. These have been
much larger than more stable inflows, such as direct investment and bank
loans. By 2000, gross non-resident transactions (purchases plus sales)
represented 52% of turnover on the equity market and 23% on the bond
market. Between 1995 and 2002, South Africa received two-thirds of gross
market-based capital flows to sub-Saharan Africa and 101% of net portfolio
equity flows. South Africa’s share of all developing country inflows was
3.3% and 22% respectively. In contrast, inflows of foreign direct investment
since 1994 have been disappointing, with gross inflows averaging $1.86 billion
per annum between 1994 and 2002. Since then, there have been a few very
large partial acquisitions of South African corporations, particularly of two
of the large commercial banks, which have increased gross foreign direct
investment inflows, but nonetheless South Africa differs from other middle-
income countries in receiving far smaller direct investment than portfolio
inflows.11 Firm surveys confirm that foreign direct investment inflows have
been small: in 2000, the median capital stock of recent foreign investors in
South Africa (firms which had entered after 1990) was estimated at only
$2 million (Gelb and Black 2004). Gross foreign direct investment inflows
are also offset by fairly substantial outflows so that there were net outflows of
direct investment in five of six years between 1994 and 1999 and also in
2004 and 2006.
A new growth path? Global boom and meltdown

Not only has recent growth been low, but its pattern has been ‘unequalising’.
Significant shifts in the sectoral composition of output and of trade between
1990 and 2003 have led to a ‘skills twist’ in the labour force, where jobs have
been created for high-skilled workers at a relatively rapid rate while
unemployment amongst low-skilled workers has grown. Output shares of
mining and manufacturing have declined while that of services increased,
with transport, communications and financial services growing particularly
52 Stephen Gelb
strongly. Within manufacturing, labour-intensive sectors (food and beverages,

textiles and clothing, and footwear) grew far slower than capital-intensive
materials-processing sub-sectors such as basic metals, wood products and
chemicals. The shift to more capital-intensive sectors was linked in part to
international trade. Between 1993 and 1997, import penetration in labour-
intensive sectors rose from 55.5% to 67.5%, driven by trade liberalisation
and squeezing domestic production and employment. At the same time, the
share of exports from capital-intensive sectors rose from 56.1% to 60.8%.
Overall, the composition of merchandise exports shifted from minerals to
basic pro-cessed goods and machinery and equipment after 1990, reflecting
increased domestic processing of natural resources (Edwards 1999; Lewis
2001).
From 2003, the government acknowledged that inequality and poverty
had not been addressed during the post-apartheid era. President Thabo Mbeki
argued that South Africa comprised ‘two economies’:
The ‘third world economy’ exists side by side with the modern ‘first
world economy’ . . . [but is] structurally disconnected from [it] . . .
[To] end the ‘third world economy’s’ underdevelopment and mar-
ginalisation . . . will require sustained government intervention [and]
resource transfers . . . includ[ing] education and training, capital for
business development and . . . social and economic infrastructure,
marketing information and appropriate technology (Mbeki 2003:
2–3).
Government policy-makers talked of ‘building a staircase’ from the second

economy to the first, suggesting that the European Union’s ‘structural funds’
to address regional disparities offered a useful model for first-economy
resources to be channelled to the second economy. In 2005, a new policy
framework was adopted, titled the Accelerated and Shared Growth Initiative
for South Africa (ASGISA), which aimed to halve the number of the
population in poverty by 2014.12 Nominally based on the ‘two economies’
concept, ASGISA targeted massive expansion of infrastructure and skills:
planned spending on infrastructure amounted to nearly 5% of GDP per
annum up to 2010, with a parallel increase in the scale of human resources
allocated to skills development and education. ASGISA intended to boost
employment by prioritising the tourism and business process outsourcing
sectors, both labour-intensive export sectors with opportunities for small
and medium-sized businesses.13 ASGISA acknowledged macroeconomic

volatility as a significant potential constraint but offered no policy to manage
it.
From a poverty-reduction perspective, ASGISA had several difficulties.
The ‘two economies’ concept explicitly assumed there were no linkages
between the first and second economies, ignoring interactions between growth
and inequality. But not only is growth unequalising – that is, first-economy
growth widens the gap between the two economies – in addition, the social
consequences of the second economy may well reduce first-economy growth,
for example by damaging investor confidence. This suggests that uplifting
the second economy may require significant restructuring of the first economy,
which could involve challenging established interests. Second, almost all the
extensive infrastructure spending programmes outlined by the public sector
since 2005 have been aimed at reducing the costs of doing business in the
first economy, rather than extending infrastructure services to those in the
second economy. Third, much greater policy priority would have to be given
to small and medium enterprises than had been true since 1994, despite oft-
stated intentions by government to increase support, both financially and
organisationally. A central obstacle in the way of both increased numbers of
small and medium enterprises in South Africa and of higher survival rates is
the low supply of entrepreneurs. As a result of black economic empowerment
(BEE) and labour market affirmative action policies, potential black
entrepreneurs are far more likely to opt for managerial or professional
positions in the (formerly white) corporate sector with a reasonably secure
and substantial salary, than for the high-risk, low-reward path (at least in the
short to medium term) of starting a small business and hoping to grow it
into a medium-size business. Fourth, the proposed ‘staircase’ linking the
two economies involved asset-building programmes such as skills
development, which the government had not been able to successfully
implement, as noted above. It was overambitious to assume that these
programmes would attain sufficient reach to meet the employment and
poverty targets by 2010. Finally, and most significantly, financial resources
were unlikely to be adequate. The social grants systems had already committed
a high level of resources to poverty alleviation, expenditure which could not
simply be redirected to finance asset-based programmes. In other words,
additional finance was necessary and, in 2005, ASGISA appeared to assume
a plentiful supply, notwithstanding that ‘easy’ fiscal gains from tax and revenue
54 Stephen Gelb
collection reform were levelling off. There was also limited political will
amongst both black and white middle classes, the bulk of taxpayers, to accept
higher taxes to support transfers to the poor, as indicated in the debate on
proposals to introduce a basic income grant (BIG) (Seekings 2002).
On the other hand, the economy grew at 4.5% in 2004 and 4.9% in
2005, as the world economy enjoyed an extended boom. Global commodity
prices rose driven by Chinese and Indian demand – indexed in dollar terms
with the value in 2000 of 100, the oil price was at 343 in 2008 and the
platinum price at 290. South Africa’s overall terms of trade rose by 19%
between 2000 and 2008. This pushed up South Africa’s export earnings,
the rand slowly but steadily appreciated after early 2002 and the risk premium
on South African bonds declined significantly. Many believed that the South
African economy had turned a corner and established itself on a higher
growth path. Domestic interest rates dropped from 17% at the end of 2002
to 10.5% in mid-2005 and asset prices rose as rapidly as elsewhere in the
world, so that wealth effects drove up consumption. The latter was further
reinforced by the rapid growth of the black middle class, which released
pent-up demand for housing and consumer durables.14
Even as ASGISA was published and despite the benefits to South Africa
of the global commodity boom, warning signs were evident that first-economy
growth might not be able to provide the extra resources the programme
implied. Consumption-fuelled growth sucked in imports, which grew nearly
10% in 2003 and 15% in 2004. In early 2006, the current account deficit
had reached 6.4% of GDP, its worst level since 1982, and it continued to
rise through 2007 and 2008, even before the onset of the financial crisis.
By early 2007 the housing price bubble in the United States had begun
to slow down, and over the next eighteen months the cracks in the inter-
national financial system widened, until the collapse of Lehman Brothers in
September 2008 plunged the world officially into a financial crisis. The
withdrawal of credit and especially of trade finance from the real economy
accelerated the contractionary impact of the financial collapse and by the
end of 2008 almost all OECD countries were in recession mode, followed
in early 2009 by most emerging markets. In South Africa, real GDP declined
during the fourth quarter of 2008 and the first quarter of 2009. Hardly had
the recession been formally acknowledged before there was talk of recovery
and a return to normality. Such optimism ignores the structural imbalances
in the world economy which underpinned the financial crisis, in particular
the interdependency between developing Asia and the OECD and especially
China and the United States. In the wake of the Asian financial crisis of the
late 1990s, Asian countries, with China in the lead, created large foreign
exchange reserve holdings to insure themselves against a repeat of that crisis,
which had led to their depending on the West and specifically the Inter-
national Monetary Fund (IMF) for support. This reinforced the long-standing
commitment to export-led growth, supported by low domestic consumption
and correspondingly very high savings in the Asian economies. At the same
time, by channelling their reserves into dollar-based assets, they helped
support declining interest rates and rising asset prices in the United States
and other Western economies and so contributed to the asset price bubble
and rising consumption driven by wealth effects, the perception amongst
households that they can consume more (and borrow more as well as save
less) as the rising values of their home and other durable assets have left
them wealthier. At the end of 2008, China had the largest foreign exchange
reserves of any country, an estimated $2 trillion, of which about 70% was
held in dollar-denominated assets. China was not only providing cheap
manufactured goods for US consumers, but in effect also saving on their
behalf.
Once the world was in recession, the interdependency between China
and the United States became a trap, in the sense that neither could afford
for China to withdraw suddenly from dollar assets – if China were to do so,
the United States would have difficulty financing its imports and be forced
to raise interest rates and cut domestic spending, leading to an even more
serious contraction, while as the dollar crashed, a large chunk of the value of
China’s foreign assets would also disappear.
The United States cannot afford to be the engine of growth for the
world by importing more because this would require even larger capital
inflows and put the country deeper into debt, at a time when it is running
an increasing fiscal deficit to try to stimulate its own economy. The other
large-deficit countries, such as the United Kingdom and France, are in a
similar position. What is needed is for trade surplus countries – led by China
– to shift to domestic-led growth, increase their imports and support export-
led growth in the deficit countries. While there has been some movement in
this direction, particularly China’s own $600 billion stimulus and the
weakening of the dollar after mid-2009, the structural economic conditions
underlying the financial crisis persist. In particular, the Chinese yuan remains
56 Stephen Gelb
essentially tied to the dollar, so that as the latter has weakened, so has the
former and Chinese exports continue to grow. The idea of normal service
resuming – that with some reform of financial and banking regulation and
fiscal stimulus in a few countries, the world economy would quickly return
to the global boom conditions of 2003–07 – was never credible.
Rather, as many commentators have pointed out, this is a crisis of
capitalism, that is, a crisis in the form of capitalism, the growth model which
has reigned supreme for the past 30 years, labelled the ‘free-market model’
by its enthusiasts and ‘neo-liberalism’ by its critics.15 Of course, this does not
mean that capitalism is facing imminent collapse but that it is confronted
with yet another turning point: for sustainable growth to resume, a new
growth model will have to be constructed. Today’s crisis is different from the
last one, which was triggered by the oil price hikes of 1973 and 1979 and a
slow decline of long-run growth via stagflation, rather than a sudden financial
implosion followed by a collapse of demand for goods, as we have had more
recently.
As also pointed out by many commentators, events during 2008–09
paralleled the stock market crash in 1929 and the onset of the Great
Depression. It took the world more than a decade and a major war to recover
economically, primarily because a new growth model for the international
economy required internationally co-ordinated action and global economic
leadership. The latter requires more than marshalling collective action
amongst leading states; it requires leadership in the sense of a government
being willing and able to carry a disproportionate share of the cost of stabilising
the global economy, not only its own economy. Just as the United States was
the only country during the 1930s able to play this role, but was for a long
time reluctant to do so, so today China is the only candidate to be global
leader, but is similarly reluctant and perhaps not yet ready for this part. The
issue that most worries the Chinese government is the effect of global
recession on domestic political stability via rising unemployment – this will
not be alleviated by China raising imports and cutting exports to assist other
countries. It is going to be very difficult for China to shift to domestic
consumption-led growth in the course of a slump, while also maintaining or
even increasing employment. In addition, there is a real question as to whether
its financial system can manage global lending responsibilities at this stage
of its development. As a result of China’s hesitancy to address the world’s
problems before its own, we should not expect a rapid or smooth resolution
of the global crisis. A growth recovery may occur, but the question to be
asked is whether it will be widespread and sustained, or brief, weak and
unstable.
Conclusion
At the outset of this chapter I asked whether the reductions in the fiscal
deficit and the inflation rate during the past decade can be taken to represent
macroeconomic ‘success’, given the volatility in the external accounts over
the same period, and second whether this ‘success’, if it be so judged, came
at too high a price in the form of low growth of output and employment.
This chapter has answered the first question in the negative and the second
in the affirmative. The ASGISA framework suggested that the (Mbeki)
government had reached similar conclusions, even if the latter strategy did
not adequately address the problem.
Jacob Zuma won political power within the ANC before the crisis became
evident, partly through the support of those who wanted government to
make the issues of inequality, poverty and employment its top priorities. By
the time the Zuma administration took over, the crisis was in full swing and
is likely to persist through the next South African election in 2014 and
perhaps longer. Until now, opinion-makers in South Africa have indulged
in a certain amount of self-congratulation about the impact of the crisis on
the economy. South Africa escaped the financial meltdown because of our
excellent financial regulations, we are told. Even though we have been badly
hit by the collapse of world trade and production, we had the foresight (or
good fortune) to have initiated a major infrastructure repair and expansion
programme before the crisis hit. So unlike many other countries, we had
public sector investment taking over as a growth driver even as exports faltered.
The tone associated with these arguments is reminiscent of the view
that South Africa had achieved macroeconomic success, which in turn led
to improved growth from 2004. Furthermore, it ignores the potential pitfalls
in the strategy to address the crisis. Almost all the infrastructure spending
programme is supposed to be undertaken by state enterprises and it is now
emerging that their weak balance sheets make most of them unable to do
the job. The government is also not in a position to foot the bill, given
falling tax revenues at the same time as rising demand for spending. As a
result, projects are being delayed and postponed across the board and it is
unclear how big the stimulus from infrastructure will ultimately be.
58 Stephen Gelb
The government has announced the major expansion of job-creation

and job-support initiatives, of training schemes and the like. The crisis is
spoken of as an ‘opportunity’ to reskill and upgrade the workforce. But are
these programmes sufficient, and even more worrying, are they efficient? In
other words, is their scale ambitious enough for current circumstances? And,
based on its past record, will the public sector actually be able to implement
these programmes even at the planned scale? Basic systems in government
are not working and yet they are facing even more pressure from these
programmes. A third risk is the likelihood of increased volatility of capital
inflows from our traditional sources, given more intense competition for
financial resources in a capital-poor world.
In South Africa it is not clear that we have abandoned what was in some
sense the core feature of our macroeconomic policy over the past decade
and a half, the implicit assumption that if we got high marks on financial
investors’ good behaviour chart, we would be rewarded with high economic
growth. This chapter has underlined the flaws in this assumption, though
they hardly need further emphasis in the wake of the financial and economic
crisis. Beyond these issues, it needs to be asked whether the government is
being bold enough in its strategy to address the slump. True, the fundamental-
ist preoccupation with inflation as the greatest threat to economic well-being
has dissipated to some extent, as reflected in the shift from budget surplus
to budget deficit, and the central bank’s interest rate cuts through most of
2009, despite its acknowledgement that inflation will be out of the target
range until late 2010. To some extent this follows the lead of the United
States, the United Kingdom and other countries, though South Africa started
cutting rates well after the authorities in those countries. There is still serious
unease about running a fiscal deficit and barely any support for what is an
irresistible case for allowing the rand to depreciate. Yet even conservative
institutions such as the US Federal Reserve Bank and the Bank of England
have during the past year acted boldly to adopt quantitative easing (‘printing
money’) and are calling for a fundamental shake-up of their financial systems.
Notes
1. The official rate in September 2007 was 23%, at which point the broad unemploy-
ment rate (including those no longer looking for work) was 34.3%. Statistics South
Africa no longer reports the broad unemployment rate.
2. All 2005 data in this paragraph are from Bhorat, Van der Westhuizen and Jacobs
(2009); $2 per day is equivalent to R174 per month in 2000 prices.
3. The Gini co-efficient ranges from 0 to 1, with 0 indicating complete equality and
1 complete inequality.
4. The idea of ‘credibility’ rests on the argument that governments have strong
incentives to commit to lower inflation to induce investment and then (after
investment occurred) to renege on the commitment to improve their chances of
re-election. Therefore investors would only commit their resources if they believed
a government’s commitment to lower inflation was ‘credible’ and would not be
reneged upon (Kydland and Prescott 1977). Neither the ‘credibility’ argument nor
the GEAR document makes any distinction between investment in financial and
real assets, though these have very different growth impacts (Gelb 1999).
5. By comparison, in 1980 the Western European average was 1.54% of GDP (Van
der Berg 2001).
6. Preventing formerly white schools from charging fees to try to maintain their quality
of education has, of course, had no impact on improving quality in poorer schools.
7. Data in this paragraph on housing are from Rust (2003), National Assembly (2008)
and Silverman and Zack (2008) and on land reform from Aliber and Mokoena
(2003) and Minister L. Xingwana, cited in Centre for Development and Enterprise
(2008).
8. Of course, the public investment rate before the debt standstill was affected both
by low GDP growth and by the apartheid government’s efforts to boost growth via
higher spending.
9. Here imports and non-gold exports mean an aggregation of goods and non-factor
services and measured as shares of GDP.
10. Net capital inflows are labelled ‘Balance on financial account (5688J)’ in the South
African Reserve Bank’s quarterly bulletins.
11. In this respect, South Africa is an outlier compared to other emerging markets
(Ahmed, Arezki and Funke 2005).
12. ASGISA’s formal launch was in February 2006 but the document was circulated
during late 2005.
13. Business process outsourcing refers to both call centres and back-office data
processing where there is no telephonic contact with customers.
14. The proportion of black people in the middle class is now estimated at 55%,
compared with 25% fifteen years ago.
15. To my mind, neither tag was accurate or very helpful.
60 Stephen Gelb
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Development Dilemmas in Post Apartheid South Africa

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Development Dilemmas in

Post-Apartheid South Africa

Edited by Bill Freund and Harald Witt

© 2010 University of KwaZulu-Natal

All rights reserved. No part of this publication may be reproduced or transmitted in

Managing editor: Sally Hines

Printed and bound by Interpak Books, Pietermaritzburg

1 Development Dilemmas in Post-Apartheid South Africa:

Part 1 The Minerals-Energy Complex and its Woes:

Part 2 The State as the Agent of Change: Conflicts over

Part 3 Struggles over Resources and the Land 219

Part 4 Household Interventions: Gender Issues 325

Notes on Contributors 403

AFRA Association for Rural Advancement

WHILE DEVELOPMENT STUDIES have proliferated as a subject for study,

the land, proletarianisation, by which means a working class was formed.

We might start with Thabo Mbeki’s well-known 2003 speech as president of

One might start by looking at the process through which Washington

move from generalities to clear and differently aimed trajectories (see

Our interventions have made a significant difference. These include

Probably the most insidious aspect of the supposed international

should be in terms of desegregation, compaction, access and opportunity

focusing on mathematics and science was unable to find anywhere in the

and profited from the extension of urban infrastructure. In Johannesburg

have experienced rapid in-migration since 1990 although the patterns of

COSATU, in the formative years of its components, struggled to create a

Instead, change in the countryside is often dominated by a racialised

Democratisation of these areas requires a wide-ranging development

minerals-energy complex past, such as the aluminium plant intended to be

consequences of faltering in political and developmental terms and of

Macroeconomic Policy and Development

IN ORDER TO UNDERSTAND development in South Africa, it is essential

The political economy of crisis and transition

corporate sector reluctantly recognised that higher growth depended on access

debate about post-apartheid economic policy, which took place in a

political legitimation. As Nelson Mandela expressed it during the ANC’s

influenced by the prevailing international conventional wisdom. In the early

Economic policy shifts since 1994

achieved, perhaps because a powerful ministry – the National Treasury –

supplement current consumption, where government has been reasonably

Success in fiscal policy has been significantly assisted by the huge

Monetary and exchange rate policy

branches and 61 representative offices in South Africa. Inflows of direct

Volatility is, of course, part of our economic system. Cycles of boom

A new growth path? Global boom and meltdown

strongly. Within manufacturing, labour-intensive sectors (food and beverages,

Government policy-makers talked of ‘building a staircase’ from the second

and medium-sized businesses.13 ASGISA acknowledged macroeconomic

The government has announced the major expansion of job-creation

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